FINRA Rule 3241 – Prevent Exploitation of Senior Investors

Recently, the Financial Industry Regulatory Authority (FINRA) issued a new regulation to protect senior investors from unscrupulous financial advisors and brokers. FINRA Rule 3241 limits the ability of a broker-dealer to be named as a beneficiary, executor, trustee, or power of attorney for one of his/her customers.

Broker-dealers must provide written notice to their firm, and the firm must assess the situation and determine whether to approve or disapprove of the fiduciary relationship.

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New FINRA Rule 3241 Preventing Elder Financial Abuse

The new FINRA rule 3241 addresses these restrictions by defining “customer” to include any customer who has, or in the previous six months has had, a securities account assigned to the registered person at any member firm.

In addition, the rule applies where a registered person associates with a new member firm even though the registered person had been named as a beneficiary or to a position of trust prior to joining the firm. And the rule prohibits brokers from instructing or asking a customer to name another person, such as the registered person’s spouse or child, to be a beneficiary of the customer’s estate.

The new FINRA rule attempts to further address and prevent conflicts of interest and exploitation, setting national standards for fiduciary relationships. The rule prohibits brokers from deriving financial gain from acting as a fiduciary beyond reasonable and customary fees for acting as such.

The rule lays out specific factors for the financial firm to consider in determining if the broker can act as fiduciary or beneficiary. These include:

  1. Any potential conflicts of interest in the registered person being named a beneficiary or holding the position of trust
  2. The length and type of relationship between the customer and the registered person
  3. The customer’s age
  4. The size of any bequest relative to the size of a customer’s estate
  5. Whether the registered representative has received other bequests or been named a beneficiary on other customer accounts
  6. Whether, based on the facts and circumstances observed in the registered person’s business relationship with the customer, the customer has a mental or physical impairment that renders him/her unable to protect his/her own interests
  7. Any indication of improper activity or conduct with respect to the customer or the customer’s account (g., excessive trading)
  8. Any indication of customer vulnerability or undue influence of the registered person over the customer

While this new rule will certainly not prevent all instances of financial exploitation and theft by financial advisors, it is yet another tool with which financial institutions and federal agencies can identify bad actors, hopefully before they harm their older clients.

If you have any questions about this post or any other elder care and special needs law matters, please contact us.

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Author: Wayne M. Pecht, Esq.
Part of the Johnson Duffie Estate and Trust Planning Team