Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving a Proposed Rule Change To Adopt FINRA Rule 3241 (Registered Person Being Named a Customer's Beneficiary or Holding a Position of Trust for a Customer), 65095-65099 [2020-22636]
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Federal Register / Vol. 85, No. 199 / Wednesday, October 14, 2020 / Notices
regulation of the market system ‘‘has
been remarkably successful in
promoting market competition in its
broader forms that are most important to
investors and listed companies.’’ The
fact that this market is competitive has
also long been recognized by the courts.
In NetCoalition v. Securities and
Exchange Commission, the D.C. Circuit
stated as follows: ‘‘[n]o one disputes
that competition for order flow is
‘fierce.’ . . . As the SEC explained, ‘[i]n
the U.S. national market system, buyers
and sellers of securities, and the brokerdealers that act as their order-routing
agents, have a wide range of choices of
where to route orders for execution’;
[and] ‘no exchange can afford to take its
market share percentages for granted’
because ‘no exchange possesses a
monopoly, regulatory or otherwise, in
the execution of order flow from broker
dealers’. . . .’’. Accordingly, the
Exchange does not believe its proposed
fee change imposes any burden on
competition that is not necessary or
appropriate in furtherance of the
purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange has not solicited, and
does not intend to solicit, comments on
this proposed rule change. The
Exchange has not received any
unsolicited written comments from
Members or other interested parties.
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III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act 12 and paragraph (f) of Rule
19b–4 13 thereunder. At any time within
60 days of the filing of the proposed rule
change, the Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission will institute proceedings
to determine whether the proposed rule
change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number
SR–CboeBYX–2020–029 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–CboeBYX–2020–029. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–CboeBYX–2020–029 and
should be submitted on or before
November 4, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.14
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–22705 Filed 10–13–20; 8:45 am]
BILLING CODE 8011–01–P
15 U.S.C. 78s(b)(3)(A).
13 17 CFR 240.19b–4(f).
12
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65095
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–90116; File No. SR–FINRA–
2020–020]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Order Approving a
Proposed Rule Change To Adopt
FINRA Rule 3241 (Registered Person
Being Named a Customer’s Beneficiary
or Holding a Position of Trust for a
Customer)
October 7, 2020.
I. Introduction
On June 23, 2020, Financial Industry
Regulatory Authority, Inc. (‘‘FINRA’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Exchange
Act’’) 1 and Rule 19b–4 thereunder,2 a
proposed rule change to adopt FINRA
Rule 3241 (Registered Person Being
Named a Customer’s Beneficiary or
Holding a Position of Trust for a
Customer). The proposed rule was
published for comment in the Federal
Register on July 9, 2020.3 On August 18,
2020, FINRA consented to an extension
of the time period in which the
Commission must approve the proposed
rule, disapprove the proposed rule, or
institute proceedings to determine
whether to approve or disapprove the
proposed rule to October 7, 2020.4 On
October 6, 2020, FINRA responded to
the comment letters received in
response to the Notice.5 This order
approves the proposed rule.
II. Description of the Proposed Rule
The proposed rule would address the
conflicts of interest that result from
registered representatives being named
beneficiaries of a customer or holding
positions of trust on behalf of a
customer for personal monetary gain.6
Specifically, the proposed rule would
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Exchange Act Release No. 89218 (July 2,
2020), 85 FR 41249 (July 9, 2020) (File No. SR–
FINRA–2020–020) (‘‘Notice’’).
4 See letter from Jeanette Wingler, Associate
General Counsel, Office of General Counsel, FINRA,
to Lourdes Gonzalez, Assistant Chief Counsel,
Division of Trading and Markets, Commission,
dated August 18, 2020.
5 See letter from Jeanette Wingler, Associate
General Counsel, Office of General Counsel, FINRA,
to Vanessa Countryman, Secretary, Commission,
dated October 6, 2020 (‘‘FINRA Letter’’). The FINRA
Letter is available on FINRA’s website at https://
www.finra.org, at the principal office of FINRA, on
the Commission’s website at https://www.sec.gov/
comments/sr-finra-2020-020/srfinra2020-020.htm,
and at the Commission’s Public Reference Room.
6 Notice at 41250.
2 17
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require a registered representative to
decline being named a beneficiary of a
customer’s estate or receiving a bequest
from a customer’s estate unless she
notifies her employer in writing and
receives written approval from the
broker-dealer prior to being named a
beneficiary of a customer’s estate or
receiving a bequest from a customer’s
estate.7 The proposed rule would also
require a registered representative to
decline being named as an executor or
trustee or holding a power of attorney or
similar position for or on behalf of a
customer unless: (1) She provides
written notice to her employer and
receives written approval from the
broker-dealer prior to acting in such
capacity or receiving any fees, assets or
other benefit in relation to acting in
such capacity; and (2) she does not
derive financial gain from acting in such
capacity other than from fees or other
charges that are reasonable and
customary for acting in such capacity.8
The proposed rule would not apply
where the customer 9 is a member of the
registered representative’s immediate
family.10
Registered Representative’s Knowledge
The proposed rule would require that
a registered representative have
knowledge that she was named as a
beneficiary or to a position of trust. A
registered representative who was
named to such a capacity without her
knowledge generally would not violate
the new rule.11 Similarly, a registered
7 Id.
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8 Id.
9 For purposes of the proposed rule, the word
‘‘customer’’ would include any customer that has,
or in the previous six months had, a securities
account assigned to the registered representative at
any FINRA member broker-dealer. Notice at 41252.
10 Notice at 41250. FINRA stated that the risk that
a registered representative misused her role in the
broker-customer relationship to be named a
beneficiary or hold a position of trust is reduced
when the customer is an immediate family member.
See Notice at 41255. Over the past five years,
FINRA stated that more than 85% of such requests
by registered representatives have been on behalf of
immediate family members. See Notice at 41253.
For purposes of the proposed rule, the term
‘‘immediate family’’ would mean parents,
grandparents, mother-in-law or father-in-law,
spouse or domestic partner, brother or sister,
brother-in-law or sister-in-law, son-in-law or
daughter-in-law, children, grandchildren, cousin,
aunt or uncle, or niece or nephew, and any other
person who resides in the same household as the
registered representative who the registered
representative financially supports, directly or
indirectly, to a material extent. The term would also
include step and adoptive relationships. Notice at
41250.
11 Notice at 41251. As described further below,
the registered representative with knowledge that
she has been named to a position of trust or as a
beneficiary to the customer’s estate would need to
provide notice to her member broker-dealer and
receive approval from the member broker-dealer
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representative cannot evade the rule by
instructing or asking a customer to name
another person, such as the registered
representative’s spouse or child, to be a
beneficiary of the customer’s estate or to
receive a bequest from the customer’s
estate.12
Broker-Dealer Notice and Approval
As stated above, the proposed rule
would require a registered
representative to notify, and receive
prior approval from, her employer if she
is named as a beneficiary or to a
position of trust by her customer.
Similarly, if a registered representative
was named as a beneficiary or to a
position of trust prior to the registered
representative’s association with the
FINRA member broker-dealer, the
proposed rule would require her, within
30 calendar days of becoming
associated, to provide notice to and
receive approval from, the broker-dealer
to maintain the beneficiary status or
position of trust.13 Furthermore, if a
registered representative was named as
a beneficiary or to a position of trust
prior to the registered representative
establishing a customer relationship
with the individual, the registered
representative and her broker-dealer
employer would need to comply with
the proposed new rule.14
The proposed rule does not prescribe
any specific form of written notice but
instead would permit a FINRA member
broker-dealer to specify the required
form of written notice for its registered
representatives.15 Upon receipt of the
written notice, the proposed rule would
require the broker-dealer to: (1) Perform
a reasonable assessment of the risks
created by the registered
representative’s assuming such status or
acting in such capacity, including, but
not limited to, an evaluation of whether
it would interfere with or otherwise
compromise the registered
representative’s responsibilities to the
customer; and (2) make a reasonable
determination of whether to approve the
registered representative’s assuming
such status or acting in such capacity,
to approve it subject to specific
conditions or limitations, or to
disapprove it.16
If a FINRA member broker-dealer
approves a registered representative
assuming such status or acting in such
capacity, the broker-dealer assumes
supervisory responsibilities following
before she may assume such status or act in such
capacity.
12 Notice at 41252.
13 Id.
14 Id.
15 Notice at 41251.
16 Id.
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approval.17 The proposed rule would
require a member firm to establish and
maintain written procedures to comply
with the proposed new rule’s
requirements.18 The proposed rule also
would require FINRA member brokerdealers to preserve the written notice
and approval for at least three years
after the date that the beneficiary status
or position of trust has terminated or the
bequest received or for at least three
years, whichever is earlier, after the
registered representative’s association
with the firm has terminated.19
Reasonable Assessment and
Determination
The proposed rule would not prohibit
a registered representative from being
named a beneficiary of, or receiving a
bequest from, a customer’s estate.
However, given the potential conflicts of
interest such arrangements create, the
proposed rule would require a FINRA
member broker-dealer to reasonably
assess the risks created by the registered
representative’s assuming such status or
acting in such capacity, taking into
consideration several factors, including,
but not limited to: (1) Any potential
conflicts of interest created by the
registered representative being named a
beneficiary or holding a position of
trust; (2) the length and type of
relationship between the customer and
registered representative; (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 brokerdealer’s business relationship with the
customer, the customer has a mental or
physical impairment that renders the
customer unable to protect his or her
17 Id. If the FNRA member broker-dealer imposes
conditions or limitations on its approval, the
broker-dealer would be required to reasonably
supervise the registered representative’s compliance
with the conditions or limitations. Moreover, where
a registered representative is knowingly named a
beneficiary, executor, or trustee or holds a power
of attorney or a similar position for or on behalf of
a customer account at the firm with which the
registered representative is associated and the firm
has approved the registered representative
assuming such status or position, the firm must
supervise the account in accordance with FINRA
Rule 3110, including the longstanding obligation to
follow-up on ‘‘red flags’’ indicating problematic
activity. If a registered representative is approved to
hold (and receive compensation for) a position of
trust for a customer away from the FINRA member
broker-dealer, the requirements of both the
proposed rule and FINRA Rule 3270 regarding
outside business activities would apply to the
activities away from the firm. Notice at 41251.
18 Id.
19 Id.
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own interests; (7) any indicia of
improper activity or conduct with
respect to the customer or the
customer’s account; and (8) any indicia
of customer vulnerability or undue
influence of the registered
representative over the customer.20
Timing
The proposed rule would apply if the
registered representative is named a
beneficiary or receives a bequest from a
customer’s estate after the effective date
of the proposed new rule. For the nonbeneficiary positions, the proposed rule
would apply to positions that the
registered representative was named to
prior to the rule becoming effective only
if the initiation of the customer
relationship between the registered
representative and the customer
occurred after the effective date of the
proposed rule.21
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III. Discussion and Commission
Findings
After careful review of the proposed
rule, the comment letters, and FINRA’s
responses to the comments, the
Commission finds that the proposed
rule is consistent with the requirements
of the Exchange Act and the rules and
regulations thereunder that are
applicable to a national securities
association.22 Specifically, the
Commission finds that the proposed
rule is consistent with Section 15A(b)(6)
of the Exchange Act,23 which requires,
among other things, that FINRA rules be
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, and, in general, to protect
investors and the public interest.
FINRA’s proposed rule aims to
address concerns related to conflicts of
interest created when registered
representatives are named beneficiaries
of a customer or hold positions of trust
on behalf of a customer for personal
monetary gain. FINRA stated that these
conflicts of interest can take many forms
and include a registered representative
benefiting from the use of undue and
inappropriate influence over important
financial decisions to the detriment of a
20 Notice at 41251. FINRA stated that while a
listed factor may not be applicable to a particular
situation, the factors that a FINRA member brokerdealer considers should allow for a reasonable
assessment of the associated risks so that the firm
can make a reasonable determination of whether to
approve the registered representative’s assuming a
status or acting in a capacity. Id.
21 Notice at 41252.
22 In approving this rule change, the Commission
has considered the rule’s impact on efficiency,
competition, and capital formation. See 15 U.S.C.
78c(f).
23 15 U.S.C. 78o–3(b)(6).
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customer.24 The proposed rule would
establish a uniform, national standard
that is designed to protect investors
from registered representatives who
might exploit their relationships with
their customers. The proposed rule
would also establish a consistent
approach to addressing these concerns
across FINRA member broker-dealers’
policies and procedures.25 The
Commission believes that the proposed
rule requiring a registered representative
to notify her employer prior to entering
into such relationships with her
customers, as well as requiring the firm
to approve and supervise the proposed
relationship after reasonable analysis of
the risks will lead to greater oversight of
registered representatives’ activities,
thereby reducing the potential risk of
customer harm.26
Two commenters support the
proposed rule, believing it will serve to
protect investors and mitigate potential
conflicts of interests that can arise from
having a customer name their registered
representative as a beneficiary or to a
position of trust.27 One commenter
stated that the proposed rule would
help promote trust and confidence in
the securities industry by ensuring that
broker-dealers establish appropriate
policies that will protect their senior
and vulnerable customers.28 The second
commenter viewed the proposed rule as
‘‘an important and necessary step in
fighting a particular form of abuse—
where registered representatives take
advantage of customers to have
themselves installed as the customers’
beneficiaries or trustees over the clients’
assets.’’ 29 However, the latter
commenter also stated that further
action was necessary. Specifically, the
commenter recommended that FINRA
adopt a uniform written notice rather
than permitting broker-dealers specify
24 See
Notice at 41250.
inconsistent approach among firms
currently allows registered representatives to
circumvent firms’ policies and procedures, for
example by resigning as a customer’s registered
representative, transferring the customer to another
registered representative, or having the customer
name the registered representative’s spouse or child
as the customer’s beneficiary. See id. The proposed
rule change is intended to cover these situations.
See Notice at 41257.
26 See letter from Samuel B. Edwards, President,
Public Investors Advocate Bar Association, dated
July 30, 2002 (‘‘PIABA Letter’’) (finding meaningful
benefit in a firm having more information available
when supervising transactions in an account for
which the firm is on notice the registered
representative has a financial interest).
27 See letter from Lisa Bleier, Managing Director,
Securities Industry and Financial Markets
Association (‘‘SIFMA’’), to Matthew DeLesDernier,
Assistant Secretary, Commission, dated July 30,
2020 (‘‘SIFMA Letter’’) and PIABA Letter.
28 SIFMA Letter.
29 PIABA Letter.
25 The
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65097
the required form of written notice for
their respective registered
representatives. The commenter
believes that this amendment to the
proposed rule would add yet another
procedural safeguard that would help
protect investors.30
As described in the Notice, FINRA
considered adopting a uniform written
notice for its member broker-dealers.31
FINRA decided, however, that it was
important to provide its members with
a level of flexibility that a uniform
written notice could not give them.32
Because the proposed rule would
require each broker-dealer to perform a
reasonable assessment and make a
determination of whether to approve or
disapprove a proposed arrangement,
FINRA believes it is important for each
firm to decide for itself the type and
amount of information needed to
perform the required assessment and
make the related determination.33
Accordingly, FINRA declined to amend
the proposed rule in response to the
comment.
The Commission recognizes the
possible costs to customers associated
with the proposed rule (for example,
less customer choice in identifying a
person to serve in a capacity of trust).34
The Commission also believes, however,
that a customer may benefit if a
registered representative’s status as
trustee or beneficiary are disclosed to
the firm and the risks of undue
influence are sufficiently mitigated.
Moreover, the proposed rule does not
prescribe any specific form of written
notice, giving firms the flexibility to
specify the required form of written
notice for its registered representatives
based on a firm’s specific business
model and resources.35 Accordingly, the
Commission believes that the proposed
rule strikes a balance by allowing a firm
to reasonably assess the risks to
customers associated with those
conflicts of interest and permitting a
registered representative to be named a
beneficiary of a customer or hold a
position of trust on behalf of a customer
30 Id.
31 See FINRA Letter (stating that regardless of its
format, the notice should provide a broker-dealer
sufficient information about the proposed
relationship upon which to perform the required
assessment and make the related determination);
see also Notice at 41256.
32 See FINRA Letter; see also Notice at 41256.
33 Id.
34 See Notice at 41253 and FINRA Letter. There
may also be costs to a customer to amend estate or
other legal documents if the broker-dealer
disapproves a registered representative being
named a beneficiary, executor, or trustee or holding
a power of attorney or a similar position for or on
behalf of the customer.
35 See Notice at 41251.
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for personal monetary gain if the firm
reasonably determines the risks are
acceptable. For these reasons, the
Commission finds that the proposed
rule will provide additional investor
protections, especially for brokerdealers who do not currently have
policies and procedures in place to
address these scenarios, or have such
policies and procedures that are either
less restrictive than the proposed rule
change or are applied inconsistently.36
One commenter stated that it
applauded FINRA for recognizing the
need for controls in this area, but it
maintained that registered persons
should be unconditionally prohibited
from being named as beneficiaries or
appointed to positions of trust by any
customer other than immediate family
members.37 In response, FINRA stated
that it considered an outright
prohibition of some or all positions of
trust, but declined to adopt a
prohibition, believing that some
positions of trust may benefit
customers 38 and the proposed rule
would establish safeguards to protect
investors, including: Requiring
disclosure of the proposed relationship
to the registered representative’s
employer broker-dealer, requiring the
firm to assess the risks of the proposed
arrangement, requiring the firm to
affirmatively approve or deny the
proposed arrangement, and reaffirming
the firm’s obligation to maintain records
regarding, and supervise, the
arrangement.39
The Commission shares the
commenter’s concern that certain
conflicts of interest create high-pressure
36 See
Notice at 41252.
letter from Christopher Gerold, President,
North American Securities Administrators
Association, Inc., to J. Matthew DeLesDernier,
Assistant Secretary, Commission, dated July 30,
2020 (‘‘NASAA Letter’’).
38 FINRA stated that it has observed that
investment professionals, including registered
persons, often develop close and trusted
relationships with their customers, which in some
instances have resulted in the investment
professional being named the customer’s
beneficiary. However, being a customer’s
beneficiary may present significant conflicts of
interest. FINRA would not expect a registered
person’s assertion that a customer has no viable
alternative person to be named a beneficiary or to
serve in a position of trust to be dispositive in the
member firm’s assessment. See Notice at 41251–2.
However, according to FINRA, there may be
circumstances where the registered representative
represents a better alternative to the customer than
other available options. Assuming a broker-dealer
has done a reasonable assessment of the potential
conflicts of interest before making a reasonable
determination to approve the arrangement, a
registered representative with financial acumen and
knowledge of a customer’s financial circumstances
may be better positioned to serve in a position of
trust than other alternatives available to the
customer. See Notice at 41253, 41255–6.
39 See FINRA Letter; see also Notice at 41254.
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37 See
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situations for registered representatives
to engage in conduct contrary to the best
interest of their customer.40 As stated
above, however, the Commission also
sees value for customers to be able to
appoint their registered representatives
to a position of trust if the risks can be
properly mitigated. The Commission
believes the proposed rule would help
mitigate the risks by requiring a brokerdealer to reasonably assess a proposed
relationship based on detailed
disclosure of the relationship by the
registered representative, and, based on
its assessment, whether to approve or
disapprove the proposed relationship,
or approve the arrangement subject to
additional conditions or limitations.41
A commenter also asked FINRA to
apply the proposed rule to preexisting
beneficiary designations or designated
positions of trust. In particular, the
commenter believes that more investors
should benefit from the proposed rule’s
protections.42 In response, FINRA stated
that many of its member broker-dealers
already have policies and procedures
prohibiting or imposing limitations on
being named as a beneficiary or to a
position of trust when there is not a
familial relationship. Accordingly,
many preexisting beneficiary
designations or positions of trust have
already been addressed by their
respective firms.43 Moreover, FINRA
believes that it would be challenging
and time-consuming for broker-dealers
to conduct a full-scale retroactive
review of all accounts across an
organization to determine whether the
arrangements currently in place are
consistent with the proposed
requirements.44 In addition, customers
may have relied on a broker-dealer’s
approval of arrangements currently in
place in drafting estate or other legal
documents, handling their assets or
performing some duties (e.g., a
registered representative may have been
named a customer’s trustee in reliance
40 See
NASAA Letter.
Rule 3241(b). The Commission notes
that the proposed rule represents the minimum a
broker-dealer must do when a registered
representative is named a beneficiary of a customer
or holds a position of trust on behalf of a customer
for personal monetary gain. The broker-dealer may
choose to go beyond the proposed rule by: (1)
Requiring notification and approval when a
registered person is named a beneficiary or to a
position of trust for immediate family members; or
(2) completely prohibiting the practice. See FINRA
Letter.
42 See NASAA Letter.
43 See FINRA Letter and Notice at 41257.
44 See FINRA Letter (citing a letter to FINRA
commenting on Regulatory Notice 19–36
(November 2019) from the Securities Industry and
Financial Markets Association, a United States
industry trade group representing securities firms,
banks, and asset management); see also Notice at
41257.
41 Proposed
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on the firm’s prior approval). As such,
FINRA states that retroactively applying
the obligations of the proposed rule
would further compound the challenge
for broker-dealers, registered
representatives and customers.45
The Commission acknowledges that if
applied retroactively the proposed rule’s
protections could benefit more
customers who designated their
registered representative a beneficiary or
to hold a position of trust. However, the
Commission also acknowledges the
resources (financial and time) firms
would expend to retroactively apply the
proposed rule to existing customers, as
well as the potential disruption to
customers who have relied on existing
arrangements with their registered
representatives. Accordingly, the
Commission believes that it is
appropriate only to apply the rule
prospectively. To the extent a registered
representative was named by a customer
as a beneficiary or to a position of trust
prior to the effective date of the
proposed rule, if that registered
representative takes a job with, and
moves the customer’s account to, a new
broker-dealer following the effective
date, she and her new firm would be
subject to the proposed rule’s
obligations.
As stated above, the Commission
finds that the proposed rule change is
consistent with Section 15A(b)(6) of the
Exchange Act.46 The Commission
believes that establishing a uniform,
baseline standard will help brokerdealers protect their customers from
those registered representatives who
might exploit their relationships with
their customers. Specifically, requiring a
registered representative to notify her
employer prior to being named a
beneficiary of a customer or holding
positions of trust on behalf of a
customer for personal monetary gain, as
well as requiring the firm to approve
and supervise the proposed relationship
after reasonable analysis of the risks,
will lead to greater oversight of
registered representatives’ activities,
thereby helping to mitigate the potential
risk of customer harm.47
IV. Conclusion
It is therefore ordered pursuant to
Section 19(b)(2) of the Exchange Act 48
45 See
FINRA Letter.
U.S.C. 78o–3(b)(6).
47 Further, FINRA stated that it would assess
registered representatives’ and broker-dealers’
conduct under the rule to determine its
effectiveness in addressing potential conflicts of
interest and evaluate whether additional
rulemaking or other action is appropriate. See
Notice at 41254.
48 15 U.S.C. 78s(b)(2).
46 15
E:\FR\FM\14OCN1.SGM
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Federal Register / Vol. 85, No. 199 / Wednesday, October 14, 2020 / Notices
that the proposed rule (SR–FINRA–
2020–020) be, and hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.49
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–22636 Filed 10–13–20; 8:45 am]
BILLING CODE 8011–01–P
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–90103; File No. SR–CBOE–
2020–089]
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change Relating To Amend Its
Fees Schedule With Respect to Its
Strategy Fee Cap
October 7, 2020.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b-4 thereunder,2
notice is hereby given that on
September 30, 2020, Cboe Exchange,
Inc. (the ‘‘Exchange’’ or ‘‘Cboe
Options’’) filed with the Securities and
Exchange Commission (the
‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
jbell on DSKJLSW7X2PROD with NOTICES
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Cboe Exchange, Inc. (the ‘‘Exchange’’
or ‘‘Cboe Options’’) proposes to amend
its Fees Schedule with respect to its
strategy fee cap. The text of the
proposed rule change is provided in
Exhibit 5.
The text of the proposed rule change
is also available on the Exchange’s
website (https://www.cboe.com/
AboutCBOE/
CBOELegalRegulatoryHome.aspx), at
the Exchange’s Office of the Secretary,
and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
49 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
VerDate Sep<11>2014
19:15 Oct 13, 2020
Jkt 253001
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
1. Purpose
The Exchange proposes to amend its
Fees Schedule in connection with its
strategy order fee cap, effective
September 30, 2020.
Effective September 1, 2020, the
Exchange amended Footnote 13 to
provide that market-maker, Clearing
Trading Permit Holder, JBO participant,
broker-dealer and non-Trading Permit
Holder market-maker transaction fees
are capped at $0.00 for all merger, short
stock interest, reversal, conversion and
jelly roll strategies executed in open
outcry on the same trading day in the
same option class across all symbols.3
Essentially, that rule change removed
three previous strategy fee cap amounts,
and, instead, adopted a $0.00 cap for
strategies executed in open outcry in all
classes (i.e., all strategies transacted on
the trading floor will be free). The
Exchange proposes to explicitly clarify
in Footnote 13 that in order for a
strategy transaction to be eligible for the
fee cap (i.e., not be assessed transaction
fees), TPHs must mark such strategy
orders with a code approved by the
Exchange identifying the orders as
eligible for the fee cap.4 The Exchange
also proposes to provide that strategy
orders executed during September 2020
will be eligible for the fee cap
notwithstanding not being marked,
provided that a TPH submits a rebate
request with supporting documentation
for such orders to the Exchange within
3 business days of September 30, 2020
(i.e., October 5, 2020).
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the
Securities Exchange Act of 1934 (the
‘‘Act’’) and the rules and regulations
thereunder applicable to the Exchange
and, in particular, the requirements of
3 See Securities Exchange Act Release No. 89831
(September 11, 2020) 85 FR 58096 (September 17,
2020) (SR–CBOE–2020–084).
4 The Exchange notes that its billing system is
unable to recognize that an order is a strategy order
absent such order being explicitly marked as a
strategy order.
PO 00000
Frm 00074
Fmt 4703
Sfmt 4703
65099
Section 6(b) of the Act.5 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 6 requirements that the rules of
an exchange be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to foster cooperation
and coordination with persons engaged
in regulating, clearing, settling,
processing information with respect to,
and facilitating transactions in
securities, to remove impediments to
and perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest.
Additionally, the Exchange believes the
proposed rule change is consistent with
Section 6(b)(4) of the Act,7 which
requires that Exchange rules provide for
the equitable allocation of reasonable
dues, fees, and other charges among its
Trading Permit Holders and other
persons using its facilities.
The Exchange believes making it clear
and explicit in its fees schedule that
TPHs must mark strategy orders with a
code approved by the Exchange in order
to receive the fee cap is reasonable as it
reduces the risk of orders not receiving
the current fee cap that would otherwise
be entitled to it by ensuring TPHs are
aware of the marking requirement.
Additionally, the clarification provides
transparency in the fees schedule and
alleviates potential confusion, thereby
removing impediments to and
perfecting the mechanism of a free and
open market and a national market
system and protecting investors and the
public interest. The Exchange also
believes the marking requirement is
equitable and not unfairly
discriminatory as it applies uniformly to
all TPHs.
The Exchange also believes it’s
reasonable to provide TPHs the option
of submitting a written rebate request to
qualify strategy orders executed in
September 2020 for the fee cap as it
provides TPHs who did not know to
mark their orders an opportunity to
receive the fee cap for strategies that
would otherwise qualify. Particularly,
the Exchange notes it operates in highly
competitive market. To respond to this
competitive marketplace, the Exchange
adopted a fee cap of $0.00 for all
strategy orders, effective September 1,
2020, which was designed to incentivize
Trading Permit Holders to increase their
strategy orders submitted to and
executed on the Exchange’s trading
floor, which can benefit all markets
5 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
7 15 U.S.C. 78f(b)(4).
6 15
E:\FR\FM\14OCN1.SGM
14OCN1
]]>Agencies
[Federal Register Volume 85, Number 199 (Wednesday, October 14, 2020)]
[Notices]
[Pages 65095-65099]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-22636]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-90116; File No. SR-FINRA-2020-020]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving a Proposed Rule Change To Adopt FINRA
Rule 3241 (Registered Person Being Named a Customer's Beneficiary or
Holding a Position of Trust for a Customer)
October 7, 2020.
I. Introduction
On June 23, 2020, Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to adopt FINRA Rule 3241
(Registered Person Being Named a Customer's Beneficiary or Holding a
Position of Trust for a Customer). The proposed rule was published for
comment in the Federal Register on July 9, 2020.\3\ On August 18, 2020,
FINRA consented to an extension of the time period in which the
Commission must approve the proposed rule, disapprove the proposed
rule, or institute proceedings to determine whether to approve or
disapprove the proposed rule to October 7, 2020.\4\ On October 6, 2020,
FINRA responded to the comment letters received in response to the
Notice.\5\ This order approves the proposed rule.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Exchange Act Release No. 89218 (July 2, 2020), 85 FR
41249 (July 9, 2020) (File No. SR-FINRA-2020-020) (``Notice'').
\4\ See letter from Jeanette Wingler, Associate General Counsel,
Office of General Counsel, FINRA, to Lourdes Gonzalez, Assistant
Chief Counsel, Division of Trading and Markets, Commission, dated
August 18, 2020.
\5\ See letter from Jeanette Wingler, Associate General Counsel,
Office of General Counsel, FINRA, to Vanessa Countryman, Secretary,
Commission, dated October 6, 2020 (``FINRA Letter''). The FINRA
Letter is available on FINRA's website at https://www.finra.org, at
the principal office of FINRA, on the Commission's website at
https://www.sec.gov/comments/sr-finra-2020-020/srfinra2020-020.htm,
and at the Commission's Public Reference Room.
---------------------------------------------------------------------------
II. Description of the Proposed Rule
The proposed rule would address the conflicts of interest that
result from registered representatives being named beneficiaries of a
customer or holding positions of trust on behalf of a customer for
personal monetary gain.\6\ Specifically, the proposed rule would
[[Page 65096]]
require a registered representative to decline being named a
beneficiary of a customer's estate or receiving a bequest from a
customer's estate unless she notifies her employer in writing and
receives written approval from the broker-dealer prior to being named a
beneficiary of a customer's estate or receiving a bequest from a
customer's estate.\7\ The proposed rule would also require a registered
representative to decline being named as an executor or trustee or
holding a power of attorney or similar position for or on behalf of a
customer unless: (1) She provides written notice to her employer and
receives written approval from the broker-dealer prior to acting in
such capacity or receiving any fees, assets or other benefit in
relation to acting in such capacity; and (2) she does not derive
financial gain from acting in such capacity other than from fees or
other charges that are reasonable and customary for acting in such
capacity.\8\ The proposed rule would not apply where the customer \9\
is a member of the registered representative's immediate family.\10\
---------------------------------------------------------------------------
\6\ Notice at 41250.
\7\ Id.
\8\ Id.
\9\ For purposes of the proposed rule, the word ``customer''
would include any customer that has, or in the previous six months
had, a securities account assigned to the registered representative
at any FINRA member broker-dealer. Notice at 41252.
\10\ Notice at 41250. FINRA stated that the risk that a
registered representative misused her role in the broker-customer
relationship to be named a beneficiary or hold a position of trust
is reduced when the customer is an immediate family member. See
Notice at 41255. Over the past five years, FINRA stated that more
than 85% of such requests by registered representatives have been on
behalf of immediate family members. See Notice at 41253.
For purposes of the proposed rule, the term ``immediate family''
would mean parents, grandparents, mother-in-law or father-in-law,
spouse or domestic partner, brother or sister, brother-in-law or
sister-in-law, son-in-law or daughter-in-law, children,
grandchildren, cousin, aunt or uncle, or niece or nephew, and any
other person who resides in the same household as the registered
representative who the registered representative financially
supports, directly or indirectly, to a material extent. The term
would also include step and adoptive relationships. Notice at 41250.
---------------------------------------------------------------------------
Registered Representative's Knowledge
The proposed rule would require that a registered representative
have knowledge that she was named as a beneficiary or to a position of
trust. A registered representative who was named to such a capacity
without her knowledge generally would not violate the new rule.\11\
Similarly, a registered representative cannot evade the rule by
instructing or asking a customer to name another person, such as the
registered representative's spouse or child, to be a beneficiary of the
customer's estate or to receive a bequest from the customer's
estate.\12\
---------------------------------------------------------------------------
\11\ Notice at 41251. As described further below, the registered
representative with knowledge that she has been named to a position
of trust or as a beneficiary to the customer's estate would need to
provide notice to her member broker-dealer and receive approval from
the member broker-dealer before she may assume such status or act in
such capacity.
\12\ Notice at 41252.
---------------------------------------------------------------------------
Broker-Dealer Notice and Approval
As stated above, the proposed rule would require a registered
representative to notify, and receive prior approval from, her employer
if she is named as a beneficiary or to a position of trust by her
customer. Similarly, if a registered representative was named as a
beneficiary or to a position of trust prior to the registered
representative's association with the FINRA member broker-dealer, the
proposed rule would require her, within 30 calendar days of becoming
associated, to provide notice to and receive approval from, the broker-
dealer to maintain the beneficiary status or position of trust.\13\
Furthermore, if a registered representative was named as a beneficiary
or to a position of trust prior to the registered representative
establishing a customer relationship with the individual, the
registered representative and her broker-dealer employer would need to
comply with the proposed new rule.\14\
---------------------------------------------------------------------------
\13\ Id.
\14\ Id.
---------------------------------------------------------------------------
The proposed rule does not prescribe any specific form of written
notice but instead would permit a FINRA member broker-dealer to specify
the required form of written notice for its registered
representatives.\15\ Upon receipt of the written notice, the proposed
rule would require the broker-dealer to: (1) Perform a reasonable
assessment of the risks created by the registered representative's
assuming such status or acting in such capacity, including, but not
limited to, an evaluation of whether it would interfere with or
otherwise compromise the registered representative's responsibilities
to the customer; and (2) make a reasonable determination of whether to
approve the registered representative's assuming such status or acting
in such capacity, to approve it subject to specific conditions or
limitations, or to disapprove it.\16\
---------------------------------------------------------------------------
\15\ Notice at 41251.
\16\ Id.
---------------------------------------------------------------------------
If a FINRA member broker-dealer approves a registered
representative assuming such status or acting in such capacity, the
broker-dealer assumes supervisory responsibilities following
approval.\17\ The proposed rule would require a member firm to
establish and maintain written procedures to comply with the proposed
new rule's requirements.\18\ The proposed rule also would require FINRA
member broker-dealers to preserve the written notice and approval for
at least three years after the date that the beneficiary status or
position of trust has terminated or the bequest received or for at
least three years, whichever is earlier, after the registered
representative's association with the firm has terminated.\19\
---------------------------------------------------------------------------
\17\ Id. If the FNRA member broker-dealer imposes conditions or
limitations on its approval, the broker-dealer would be required to
reasonably supervise the registered representative's compliance with
the conditions or limitations. Moreover, where a registered
representative is knowingly named a beneficiary, executor, or
trustee or holds a power of attorney or a similar position for or on
behalf of a customer account at the firm with which the registered
representative is associated and the firm has approved the
registered representative assuming such status or position, the firm
must supervise the account in accordance with FINRA Rule 3110,
including the longstanding obligation to follow-up on ``red flags''
indicating problematic activity. If a registered representative is
approved to hold (and receive compensation for) a position of trust
for a customer away from the FINRA member broker-dealer, the
requirements of both the proposed rule and FINRA Rule 3270 regarding
outside business activities would apply to the activities away from
the firm. Notice at 41251.
\18\ Id.
\19\ Id.
---------------------------------------------------------------------------
Reasonable Assessment and Determination
The proposed rule would not prohibit a registered representative
from being named a beneficiary of, or receiving a bequest from, a
customer's estate. However, given the potential conflicts of interest
such arrangements create, the proposed rule would require a FINRA
member broker-dealer to reasonably assess the risks created by the
registered representative's assuming such status or acting in such
capacity, taking into consideration several factors, including, but not
limited to: (1) Any potential conflicts of interest created by the
registered representative being named a beneficiary or holding a
position of trust; (2) the length and type of relationship between the
customer and registered representative; (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 broker-dealer's business
relationship with the customer, the customer has a mental or physical
impairment that renders the customer unable to protect his or her
[[Page 65097]]
own interests; (7) any indicia of improper activity or conduct with
respect to the customer or the customer's account; and (8) any indicia
of customer vulnerability or undue influence of the registered
representative over the customer.\20\
---------------------------------------------------------------------------
\20\ Notice at 41251. FINRA stated that while a listed factor
may not be applicable to a particular situation, the factors that a
FINRA member broker-dealer considers should allow for a reasonable
assessment of the associated risks so that the firm can make a
reasonable determination of whether to approve the registered
representative's assuming a status or acting in a capacity. Id.
---------------------------------------------------------------------------
Timing
The proposed rule would apply if the registered representative is
named a beneficiary or receives a bequest from a customer's estate
after the effective date of the proposed new rule. For the non-
beneficiary positions, the proposed rule would apply to positions that
the registered representative was named to prior to the rule becoming
effective only if the initiation of the customer relationship between
the registered representative and the customer occurred after the
effective date of the proposed rule.\21\
---------------------------------------------------------------------------
\21\ Notice at 41252.
---------------------------------------------------------------------------
III. Discussion and Commission Findings
After careful review of the proposed rule, the comment letters, and
FINRA's responses to the comments, the Commission finds that the
proposed rule is consistent with the requirements of the Exchange Act
and the rules and regulations thereunder that are applicable to a
national securities association.\22\ Specifically, the Commission finds
that the proposed rule is consistent with Section 15A(b)(6) of the
Exchange Act,\23\ which requires, among other things, that FINRA rules
be designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, and, in general, to
protect investors and the public interest.
---------------------------------------------------------------------------
\22\ In approving this rule change, the Commission has
considered the rule's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\23\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------
FINRA's proposed rule aims to address concerns related to conflicts
of interest created when registered representatives are named
beneficiaries of a customer or hold positions of trust on behalf of a
customer for personal monetary gain. FINRA stated that these conflicts
of interest can take many forms and include a registered representative
benefiting from the use of undue and inappropriate influence over
important financial decisions to the detriment of a customer.\24\ The
proposed rule would establish a uniform, national standard that is
designed to protect investors from registered representatives who might
exploit their relationships with their customers. The proposed rule
would also establish a consistent approach to addressing these concerns
across FINRA member broker-dealers' policies and procedures.\25\ The
Commission believes that the proposed rule requiring a registered
representative to notify her employer prior to entering into such
relationships with her customers, as well as requiring the firm to
approve and supervise the proposed relationship after reasonable
analysis of the risks will lead to greater oversight of registered
representatives' activities, thereby reducing the potential risk of
customer harm.\26\
---------------------------------------------------------------------------
\24\ See Notice at 41250.
\25\ The inconsistent approach among firms currently allows
registered representatives to circumvent firms' policies and
procedures, for example by resigning as a customer's registered
representative, transferring the customer to another registered
representative, or having the customer name the registered
representative's spouse or child as the customer's beneficiary. See
id. The proposed rule change is intended to cover these situations.
See Notice at 41257.
\26\ See letter from Samuel B. Edwards, President, Public
Investors Advocate Bar Association, dated July 30, 2002 (``PIABA
Letter'') (finding meaningful benefit in a firm having more
information available when supervising transactions in an account
for which the firm is on notice the registered representative has a
financial interest).
---------------------------------------------------------------------------
Two commenters support the proposed rule, believing it will serve
to protect investors and mitigate potential conflicts of interests that
can arise from having a customer name their registered representative
as a beneficiary or to a position of trust.\27\ One commenter stated
that the proposed rule would help promote trust and confidence in the
securities industry by ensuring that broker-dealers establish
appropriate policies that will protect their senior and vulnerable
customers.\28\ The second commenter viewed the proposed rule as ``an
important and necessary step in fighting a particular form of abuse--
where registered representatives take advantage of customers to have
themselves installed as the customers' beneficiaries or trustees over
the clients' assets.'' \29\ However, the latter commenter also stated
that further action was necessary. Specifically, the commenter
recommended that FINRA adopt a uniform written notice rather than
permitting broker-dealers specify the required form of written notice
for their respective registered representatives. The commenter believes
that this amendment to the proposed rule would add yet another
procedural safeguard that would help protect investors.\30\
---------------------------------------------------------------------------
\27\ See letter from Lisa Bleier, Managing Director, Securities
Industry and Financial Markets Association (``SIFMA''), to Matthew
DeLesDernier, Assistant Secretary, Commission, dated July 30, 2020
(``SIFMA Letter'') and PIABA Letter.
\28\ SIFMA Letter.
\29\ PIABA Letter.
\30\ Id.
---------------------------------------------------------------------------
As described in the Notice, FINRA considered adopting a uniform
written notice for its member broker-dealers.\31\ FINRA decided,
however, that it was important to provide its members with a level of
flexibility that a uniform written notice could not give them.\32\
Because the proposed rule would require each broker-dealer to perform a
reasonable assessment and make a determination of whether to approve or
disapprove a proposed arrangement, FINRA believes it is important for
each firm to decide for itself the type and amount of information
needed to perform the required assessment and make the related
determination.\33\ Accordingly, FINRA declined to amend the proposed
rule in response to the comment.
---------------------------------------------------------------------------
\31\ See FINRA Letter (stating that regardless of its format,
the notice should provide a broker-dealer sufficient information
about the proposed relationship upon which to perform the required
assessment and make the related determination); see also Notice at
41256.
\32\ See FINRA Letter; see also Notice at 41256.
\33\ Id.
---------------------------------------------------------------------------
The Commission recognizes the possible costs to customers
associated with the proposed rule (for example, less customer choice in
identifying a person to serve in a capacity of trust).\34\ The
Commission also believes, however, that a customer may benefit if a
registered representative's status as trustee or beneficiary are
disclosed to the firm and the risks of undue influence are sufficiently
mitigated. Moreover, the proposed rule does not prescribe any specific
form of written notice, giving firms the flexibility to specify the
required form of written notice for its registered representatives
based on a firm's specific business model and resources.\35\
Accordingly, the Commission believes that the proposed rule strikes a
balance by allowing a firm to reasonably assess the risks to customers
associated with those conflicts of interest and permitting a registered
representative to be named a beneficiary of a customer or hold a
position of trust on behalf of a customer
[[Page 65098]]
for personal monetary gain if the firm reasonably determines the risks
are acceptable. For these reasons, the Commission finds that the
proposed rule will provide additional investor protections, especially
for broker-dealers who do not currently have policies and procedures in
place to address these scenarios, or have such policies and procedures
that are either less restrictive than the proposed rule change or are
applied inconsistently.\36\
---------------------------------------------------------------------------
\34\ See Notice at 41253 and FINRA Letter. There may also be
costs to a customer to amend estate or other legal documents if the
broker-dealer disapproves a registered representative being named a
beneficiary, executor, or trustee or holding a power of attorney or
a similar position for or on behalf of the customer.
\35\ See Notice at 41251.
\36\ See Notice at 41252.
---------------------------------------------------------------------------
One commenter stated that it applauded FINRA for recognizing the
need for controls in this area, but it maintained that registered
persons should be unconditionally prohibited from being named as
beneficiaries or appointed to positions of trust by any customer other
than immediate family members.\37\ In response, FINRA stated that it
considered an outright prohibition of some or all positions of trust,
but declined to adopt a prohibition, believing that some positions of
trust may benefit customers \38\ and the proposed rule would establish
safeguards to protect investors, including: Requiring disclosure of the
proposed relationship to the registered representative's employer
broker-dealer, requiring the firm to assess the risks of the proposed
arrangement, requiring the firm to affirmatively approve or deny the
proposed arrangement, and reaffirming the firm's obligation to maintain
records regarding, and supervise, the arrangement.\39\
---------------------------------------------------------------------------
\37\ See letter from Christopher Gerold, President, North
American Securities Administrators Association, Inc., to J. Matthew
DeLesDernier, Assistant Secretary, Commission, dated July 30, 2020
(``NASAA Letter'').
\38\ FINRA stated that it has observed that investment
professionals, including registered persons, often develop close and
trusted relationships with their customers, which in some instances
have resulted in the investment professional being named the
customer's beneficiary. However, being a customer's beneficiary may
present significant conflicts of interest. FINRA would not expect a
registered person's assertion that a customer has no viable
alternative person to be named a beneficiary or to serve in a
position of trust to be dispositive in the member firm's assessment.
See Notice at 41251-2. However, according to FINRA, there may be
circumstances where the registered representative represents a
better alternative to the customer than other available options.
Assuming a broker-dealer has done a reasonable assessment of the
potential conflicts of interest before making a reasonable
determination to approve the arrangement, a registered
representative with financial acumen and knowledge of a customer's
financial circumstances may be better positioned to serve in a
position of trust than other alternatives available to the customer.
See Notice at 41253, 41255-6.
\39\ See FINRA Letter; see also Notice at 41254.
---------------------------------------------------------------------------
The Commission shares the commenter's concern that certain
conflicts of interest create high-pressure situations for registered
representatives to engage in conduct contrary to the best interest of
their customer.\40\ As stated above, however, the Commission also sees
value for customers to be able to appoint their registered
representatives to a position of trust if the risks can be properly
mitigated. The Commission believes the proposed rule would help
mitigate the risks by requiring a broker-dealer to reasonably assess a
proposed relationship based on detailed disclosure of the relationship
by the registered representative, and, based on its assessment, whether
to approve or disapprove the proposed relationship, or approve the
arrangement subject to additional conditions or limitations.\41\
---------------------------------------------------------------------------
\40\ See NASAA Letter.
\41\ Proposed Rule 3241(b). The Commission notes that the
proposed rule represents the minimum a broker-dealer must do when a
registered representative is named a beneficiary of a customer or
holds a position of trust on behalf of a customer for personal
monetary gain. The broker-dealer may choose to go beyond the
proposed rule by: (1) Requiring notification and approval when a
registered person is named a beneficiary or to a position of trust
for immediate family members; or (2) completely prohibiting the
practice. See FINRA Letter.
---------------------------------------------------------------------------
A commenter also asked FINRA to apply the proposed rule to
preexisting beneficiary designations or designated positions of trust.
In particular, the commenter believes that more investors should
benefit from the proposed rule's protections.\42\ In response, FINRA
stated that many of its member broker-dealers already have policies and
procedures prohibiting or imposing limitations on being named as a
beneficiary or to a position of trust when there is not a familial
relationship. Accordingly, many preexisting beneficiary designations or
positions of trust have already been addressed by their respective
firms.\43\ Moreover, FINRA believes that it would be challenging and
time-consuming for broker-dealers to conduct a full-scale retroactive
review of all accounts across an organization to determine whether the
arrangements currently in place are consistent with the proposed
requirements.\44\ In addition, customers may have relied on a broker-
dealer's approval of arrangements currently in place in drafting estate
or other legal documents, handling their assets or performing some
duties (e.g., a registered representative may have been named a
customer's trustee in reliance on the firm's prior approval). As such,
FINRA states that retroactively applying the obligations of the
proposed rule would further compound the challenge for broker-dealers,
registered representatives and customers.\45\
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\42\ See NASAA Letter.
\43\ See FINRA Letter and Notice at 41257.
\44\ See FINRA Letter (citing a letter to FINRA commenting on
Regulatory Notice 19-36 (November 2019) from the Securities Industry
and Financial Markets Association, a United States industry trade
group representing securities firms, banks, and asset management);
see also Notice at 41257.
\45\ See FINRA Letter.
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The Commission acknowledges that if applied retroactively the
proposed rule's protections could benefit more customers who designated
their registered representative a beneficiary or to hold a position of
trust. However, the Commission also acknowledges the resources
(financial and time) firms would expend to retroactively apply the
proposed rule to existing customers, as well as the potential
disruption to customers who have relied on existing arrangements with
their registered representatives. Accordingly, the Commission believes
that it is appropriate only to apply the rule prospectively. To the
extent a registered representative was named by a customer as a
beneficiary or to a position of trust prior to the effective date of
the proposed rule, if that registered representative takes a job with,
and moves the customer's account to, a new broker-dealer following the
effective date, she and her new firm would be subject to the proposed
rule's obligations.
As stated above, the Commission finds that the proposed rule change
is consistent with Section 15A(b)(6) of the Exchange Act.\46\ The
Commission believes that establishing a uniform, baseline standard will
help broker-dealers protect their customers from those registered
representatives who might exploit their relationships with their
customers. Specifically, requiring a registered representative to
notify her employer prior to being named a beneficiary of a customer or
holding positions of trust on behalf of a customer for personal
monetary gain, as well as requiring the firm to approve and supervise
the proposed relationship after reasonable analysis of the risks, will
lead to greater oversight of registered representatives' activities,
thereby helping to mitigate the potential risk of customer harm.\47\
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\46\ 15 U.S.C. 78o-3(b)(6).
\47\ Further, FINRA stated that it would assess registered
representatives' and broker-dealers' conduct under the rule to
determine its effectiveness in addressing potential conflicts of
interest and evaluate whether additional rulemaking or other action
is appropriate. See Notice at 41254.
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IV. Conclusion
It is therefore ordered pursuant to Section 19(b)(2) of the
Exchange Act \48\
[[Page 65099]]
that the proposed rule (SR-FINRA-2020-020) be, and hereby is, approved.
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\48\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\49\
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\49\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-22636 Filed 10-13-20; 8:45 am]
BILLING CODE 8011-01-P
