In today's BrokeAndBroker.com Blog, publisher Bill Singer, Esq. considers yet another case in which a stockbroker is appointed both an executor and beneficiary of an elderly client's estate. Yeah, sure . . . roll your eyes and shake your head because such a circumstance should warrant concern. On the other hand, when you read the fact pattern, you'll see that there are some nuances to this particular matter that may dispel some of your first impressions.
Case In Point
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Cecil B. Byers submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Cecil B. Byers, Respondent (AWC 2015046758101, November 8, 2017).
The AWC asserts that in 1978, Byers entered the securities industry and from December 14, 2010 to July 31, 2015, he was associated with FINRA member firm Wells Fargo Advisors, LLC. The AWC asserts that he has "no prior disciplinary history."
The AWC alleges that Byers was the registered representative for 30 years for a customer identified in the AWC only as "HI." On October 26, 2014, HI died at the age of 97. In her Last Will and Testament dated August 20, 2014, HI named Byers as residual beneficiary and co-executor of her estate.
Wells Fargo Fiduciary Policy
The AWC concedes that Byers became aware of the terms of the will only two days before HI's death. The AWC asserts that for all times relevant to this matter:
[W]ells Fargo's written supervisory procedures prohibited its registered representatives from accepting from any client a fiduciary appointment, including executor, without the permission of the compliance department. The policies also prohibited a registered representative from accepting any designation as beneficiary, including under a will or trust, without the permission of compliance, unless the bequest was from a family member.
The AWC alleges that Byers did not disclose to Wells Fargo, in contravention of the firm's policies, either his status as HI's beneficiary or his role as a co-executor of her estate. Pointedly, the AWC asserts that Wells Fargo:
[F]irst learned of the appointments on December 15, 2014, when the Firm received notice of probate litigation related to HI's estate. The probate petition objected to Byers's positions as co-executor and beneficiary of HI's estate. Byers had himself removed as co-executor almost immediately after the filing of the probate petition. As a result of the probate litigation, Byers did not inherit any funds from HI's estate.
Online FINRA BrokerCheck files as of November 10, 2017, disclose that on July 31, 2015, Byers voluntarily resigned from Wells Fargo Advisors, which noted under "Allegations":
VOLUNTARILY RESIGNED DUE TO STATUS AS A NAMED BENEFICIARY OF AN UNRELATED CLIENT'S ACCOUNT. FA STATED HE WAS A LONG-TIME FRIEND OF THE CLIENT
In response to his firm's commentary, Byers submitted a statement:
I VOLUNTARILY RESIGNED AFTER MY FORMER FIRM BECAME AWARE THAT I WAS A NAMED BENEFICIARY IN AN UNRELATED CLIENT ACCOUNT. THE CLIENT IS A LONG-TIME FRIEND AND I WAS UNAWARE THAT THEY NAMED ME AS A BENEFICIARY OF THE ACCOUNT.
FINRA deemed Byers' failure to disclose as constituting a violation of FINRA Rule 2010. In accordance with the terms of the AWC, FINRA imposed upon Byers a $10,000 fine and a two-month suspension from association withany FINRA member in all capacities.
Bill Singer's Comment
Let me make it abundantly clear that I fully comprehend the legitimate concern about stockbrokers serving as an executor and/or being named as a beneficiary of a customer's estate. Too often such designations are procured under questionable circumstances and raise very troubling questions. Consequently, both FINRA and its member firms are pursuing appropriate policies when attempting to regulate such matters.
My quibble with cases similar to Byers (and there are many) is that the typical brokerage firm's policies and FINRA's enforcement don't always satisfactorily address those circumstances where the stockbroker has been named as a beneficiary or executor without his or her prior knowledge. As such, a firm's requirement to "not accept" such designations may prove a clumsy proscription when there was no meaningful opportunity to reject. Of course you do have the discretion to refuse to serve as an executor and you do have the right to reject your status as a beneficiary, but, let's be honest here, that decision will likely be weighed along the lines of how much have I been left versus how much will it cost me to lose my job. After that cost-benefits analysis, a beneficiary stockbroker who stands to inherit millions may simply resign from a brokerage firm.
Somewhat lost in Byers' case is that he allegedly knew about HI's designations on October 24, 2014, and that Wells Fargo first became aware of the designations on December 15, 2014, when it received the probate petition in contradistinction to any notification from Byers. Consequently, Wells Fargo learned about the designations within something just shy of two months. Did Byers have an obligation to notify Wells Fargo? That raises an interesting question. Wells Fargo's policy, as set forth in the AWC, says that the firm:
prohibited its registered representatives from accepting from any client a fiduciary appointment, including executor, without the permission of the compliance department. The policies also prohibited a registered representative from accepting any designation as beneficiary, including under a will or trust, without the permission of compliance, unless the bequest was from a family member.
It doesn't say in that language that the registered rep has an obligation to notify the firm upon learning of the designation as a fiduciary or beneficiary. It says that a rep can't "accept" such an appointment without the firm's permission (unless the bequest was from a family member). What exactly constitutes an acceptance of the appointment as an executor or as a beneficiary? There is a fair legal argument to be made that you do not have to formally renounce such designations but may simply decide not to undertake any actions as an executor or file any letters/petitions on your behalf. In Byers' case, HI had apparently appointed a co-executor, so Byers' failure to renounce may not have had any difference on the steps taken in probate.
When it comes to acceptance of the bequest as a beneficiary, there is a nuance of difference between renouncing the bequest and not accepting the bequest. If, for example, I realize that specific assets bequeathed to me no longer exist, I may simply opt to do nothing given the failure of the gift. Similarly, if I am merely a residuary beneficiary and I have determined that there will not be any residual assets after the primary gifts are distributed, I may allow events to play out rather than renounce the bequest. In the end, I haven't renounced the bequest but I also have not accepted them. The AWC is mute as to whether Byers took steps to serve as a co-executor or to accept his bequest. As was noted in the Byers AWC:
The probate petition objected to Byers's positions as co-executor and beneficiary of HI's estate. Byers had himself removed as co-executor almost immediately after the filing of the probate petition. As a result of the probate litigation, Byers did not inherit any funds from HI's estate.
Consequently, Byers stepped down as an executor and for reasons not quite explained, the result of probate did not provide any inheritance to Byers. In light of those developments, I'm not quite sure that I understand the basis for imposing a $10,000 and two-month suspension. I'm not saying that the dual sanctions are unreasonable but given the lack of any allegation that Byers engineered his appointment as an executor and beneficiary, I would have appreciate a bit of explanation as to how the dollars and months of the sanctions were calculated.