May 25, 2023
A Wells Fargo customer wanted to name her stockbroker as a Beneficiary of her accounts. In accordance with Wells Fargo policy, the stockbroker asked the firm for permission to accept the Beneficiary designation, but the firm declined to authorize the role. About a year later, the stockbroker suggested that the customer designate as Beneficiary a friend of the stockbroker, and the customer complied. Now what?
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, Mark Allen Brewer submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted.
In the Matter of Mark Allen Brewer, Respondent (FINRA AWC 2022074661401) https://www.finra.org/sites/default/files/fda_documents/2022074661401 %20Mark%20Allen%20Brewer%20CRD%202110659%20AWC%20vr.pdf The AWC asserts that Mark Allen Brewer was first registered in 1991, and since 2008, he was registered with Wells Fargo Clearing Services, LLC.
As alleged in part in the AWC:
Since 2016, Brewer has been the registered representative on two Wells Fargo accounts held by a customer. After the customer’s spouse passed away in March 2020, the customer informed Brewer, whom she considered a friend, that she wanted to designate him as a beneficiary of her Wells Fargo accounts. In April 2020, Brewer requested that Wells Fargo approve his request to be named as beneficiary of the customer’s accounts. . . .
Registered Person As Customer's Beneficiary
As the fact pattern unfolds, we see that since 2018, Brewer was the rep for two of the customer's accounts, and after her husband died in March 2020, she "informed" Brewer that she wanted to designate him as her Beneficiary on the two accounts. That's not my wording. That's FINRA's. The AWC says that the customer informed Brewer of her beneficiary intentions. Now what? Well, for starters, let's consider FINRA's rulebook:
FINRA Rule 3241. Registered Person Being Named a Customer’s Beneficiary or Holding a Position of Trust for a Customer
(a) Obligations of the Registered Person
(1) A registered person shall decline being named a beneficiary of a customer’s estate or receiving a bequest from a customer’s estate upon learning of such status unless one of the following conditions is satisfied:
(A) The customer is a member of the registered person's immediate family; or
(B) Upon learning of such status, the registered person provides written notice describing the proposed status to the member with which the registered person is associated, in such form as specified by the member, and receives written approval from that member of such status prior to being named a beneficiary of a customer’s estate or receiving a bequest from a customer’s estate. If the member disapproves the status or places conditions or limitations on it, the registered person shall not assume such status or shall comply with such conditions or limitations.
(2) A registered person shall decline being named as an executor or trustee or holding a power of attorney or similar position for or on behalf of a customer upon learning of such status unless one of the following conditions is satisfied:
(A) The customer is a member of the registered person's immediate family; or
(B) Upon learning of such status, the registered person provides written notice describing the position and the person’s proposed role to the member with which the registered person is associated, in such form as specified by the member, and receives written approval from that member of such status prior to acting in such capacity or receiving any fees, assets or other benefit in relation to acting in such capacity; and
(i) The registered person 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; and
(ii) If the member disapproves the position or places conditions or limitations on it, the registered person shall not act in such capacity or shall comply with such conditions or limitations.
(b) Obligations of a Member Receiving Notice
(1) Upon receipt of a written notice as described in Rule 3241(a), a member shall:
(A) Perform a reasonable assessment of the risks created by the registered person’s assuming such status or acting in such capacity, including, but not limited to, an evaluation of whether it will interfere with or otherwise compromise the registered person’s responsibilities to the customer; and
(B) Make a reasonable determination of whether to approve the registered person’s assuming such status or acting in such capacity, to approve it subject to specific conditions or limitations, or to disapprove it.
(2) Upon completion of the member’s assessment, a member shall advise the registered person in writing whether the member:
(A) Approves the person’s assuming such status or acting in such capacity and imposes any conditions or limitations on the person’s holding the position; or
(B) Disapproves the person’s assuming such status or acting in such capacity.
(3) If the member imposes conditions or limitations on its approval of the person’s assuming such status or acting in such capacity, the member shall reasonably supervise the registered person’s compliance with such conditions or limitations.
(4) A member shall establish and maintain written procedures to comply with the requirements of paragraph (b) of this Rule.
(c) Definition of Immediate Family
The term “immediate family” means 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 person and the registered person financially supports, directly or indirectly, to a material extent. The term includes step and adoptive relationships.
• • • Supplementary Material ***
.01 Customer. For purposes of this Rule, a “customer” would include any customer that has, or in the previous six months had, a securities account assigned to the registered person at any member.
.02 Estate. For purposes of this Rule, a customer’s estate would include any cash and securities, real estate, insurance, trusts, annuities, business interests and other assets that the customer owns or has an interest in at the time of death.
.03 Record Retention. For purposes of paragraph (b) of this Rule, members shall 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 person’s association with the member has terminated.
.04 Position Prior to Association With Member. If a registered person was named as a beneficiary or to a position of trust prior to the registered person's association with the member, the registered person, within 30 calendar days of becoming so associated, shall provide notice to and receive approval from the member consistent with this Rule to maintain the beneficiary status or position of trust.
.05 Pre-Existing Positions. With respect to agreements to assume such status or act in such capacity that were entered into prior to the existence of a broker-customer relationship, such as where the customer was not a customer of the registered person at the time at which the registered person was named beneficiary or to a position of trust, these agreements raise similar conflict of interest concerns as agreements to assume such status or act in such capacity entered into subsequent to the existence of a broker-customer relationship. Therefore, the registered person must act consistent with paragraph (a) of this Rule for any existing beneficiary status or position of trust prior to the initiation of the broker-customer relationship. Moreover, upon receipt of notice of such a position, the member should evaluate the beneficiary status or position of trust consistent with paragraph (b) of this Rule.
.06 Naming Other Persons. A registered person instructing or asking a customer to name another person to be a beneficiary of the customer’s estate or to receive a bequest from the customer’s estate would present similar conflict of interest concerns as the registered person being so named. Accordingly, a registered person 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 or to receive a bequest from the customer’s estate would not be consistent with paragraph (a)(1) of the Rule.
Wells Fargo Says "NO"
After requesting Wells Fargo's authorization to allow him accept the Beneficiary role in his customers' account, Brewer didn't get the answer that he likely wanted:
[W]ells Fargo denied that request because the firm prohibits representatives from being named as a beneficiary of any customer account unless the customer is an immediate family member.
Brewer Asks for Wells Fargo's Approval (Again)
Sometimes "no" means "no," and sometimes it's an invitation to re-think the question and/or reinterpret the answer. The Brewer AWC offers this evolution:
In April 2021, the customer again asked if she could change her beneficiary designations to name Brewer as beneficiary of her accounts, which Brewer declined. Instead, after discussing other options, Brewer suggested that the customer submit two applications changing the beneficiary designations of the customer’s accounts to an individual who was a family friend of Brewer, but who had no connection to or relationship with the customer. The customer agreed and Brewer submitted the requests to Wells Fargo. Brewer did not disclose to Wells Fargo that the individual the customer had named as beneficiary of her accounts was Brewer’s friend. Wells Fargo approved the customer’s beneficiary change requests.
The customer removed Brewer’s friend as beneficiary of her Wells Fargo accounts after the firm contacted her about the beneficiary designation.
By asking a customer to designate Brewer’s friend as a beneficiary of the customer’s accounts, Brewer violated FINRA Rules 3241 and 2010.
In accordance with the terms of the AWC, FINRA imposed upon Brewer a $5,000 fine and a 45-calendar-day suspension from associating with any FINRA member in all capacities.
Bill Singer's Comment
https://www.finra.org/sites/default/files/2020-06/SR-FINRA-2020-020.pdf Among the Comments was this:
Comment submitted by Bill Singer, Esq., publisher of the BrokeAndBroker.com Blog and the Securities Industry Commentator Feed:
A potential flaw in the Proposed Rule is presented in supplementary Material .06 [Ed: emphasis supplied]:
a registered person 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 or to receive a bequest from the customer's estate would not be consistent with paragraph (a)(1) of the Rule.
As contemplated in (a)(1) of the Proposed Rule, a registered person shall decline being named a beneficiary of a customer's estate or receiving a bequest from a customer's estate upon learning of such status . . ." As such, the Supplementary
Material .06 extends that obligation of declination to a scenario whereby the registered person instructs or asks a customer to, in effect, name a third-party as a beneficiary or recipient of a bequest. Unfortunately, I can easily imagine a clever stockbroker having a conversation lacking in any prohibited instruction or asking but
which, nevertheless, prompts the customer to undertake a bequest. For example, a stockbroker might engage a vulnerable widow along the lines of:
I wish that I could do more for you and I know that you would love to show me all your appreciation for all the free light bulbs and coffee cake that I bought for you over the years, but it would be improper for me to instruct you to name me or another person as your beneficiary and, similarly, it would be improper for me to ask you to name me or another person as the recipient of any kind of bequest. And you know I would never, ever do anything improper. I mean, you know, sure, if you decided on your own to name me or my wife or kids as a beneficiary, well, I would always be grateful, eternally so, but, that would be up to you and, like I said, I would never, ever instruct or ask you to take such a thoughtful step. By the way, let me leave a photo of my kids with you -- we're hoping to send Jack to college this year, and, in another two years, to send Jill. I only hope that I can afford the killer costs of college. Oh, and another thing, before I go, my wife Jane baked you another coffee cake from her mother's recipe.
Notwithstanding the best of intentions, Supplementary Material .06 still leaves the door wide open. Similarly, another glaring loophole is that an unscrupulous stockbroker could simply arrange to have his wife or other third-party ask the customer to undertake the bequest -- and then, the stockbroker could argue (and with some effect) that he was not named as a beneficiary and he did not instruct or ask the customer to name the third party at issue. Moreover, since the third party would likely not be an associated person of a FINRA member firm, FINRA might find it difficult to compel that individual's testimony during its investigation and any subsequent hearing.
I have been involved with many situations where an estate bequest or transfer-ondeath ("TOD") is at issue. When faced with the consequences of such a scenario, the stockbroker's calculation often entails the somewhat pragmatic (and cynical) weighing of the value of the gift versus the financial detriment arising from being fired -- versus any potential suspension or fine that FINRA may impose. If the bequest is in the millions, that often prompts an easy albeit mercenary decision to keep the gift and pay what comes off as a freight charge. In the end, it may well be that FINRA's best intentions can only be extended so far. And when we arrive at the end of that self-regulatory tether, it may be that state and federal laws will need to be revised to best (or better) address the consequences of financial professionals taking advantage of their elderly or vulnerable customers.
Page 154 - 155 of FINRA's Proposed Rule Change Submission to SEC
In addressing comment that I had submitted in response to proposed Rule 3241, the SEC Order noted in part that:
Naming Other Persons
Singer suggested that proposed Supplementary Material .06 applying the proposed rule change where the registered person instructs or asks a customer to name a third-party as the customer’s beneficiary may not be sufficiently broad because: (1) the registered person could suggest or imply that the customer should name the third-party without instructing or asking; or (2) the third-party (e.g., the registered person’s spouse) could communicate with the customer to avoid triggering the rule.
Proposed Supplementary Material .06 is intended to cover situations where the registered person attempts to circumvent the proposed rule change’s restrictions. In these situations, the registered person may communicate with the customer in a manner where the registered person will seek to deny instructing or asking the customer to act and instead argue that the customer acted on his own volition (e.g., by having a third-party communicate with the customer). FINRA would interpret proposed Supplementary Material .06 broadly to cover these situations. For example, FINRA would interpret proposed Supplementary Material .06 to apply to situations where: (1) the registered person suggests or implies that the customer name another person, such as the registered person’s spouse or child, to be a beneficiary of the customer’s estate or to receive a bequest from the customer’s estate; or (2) the registered person’s spouse or another third party acts on behalf of the registered person to communicate with the customer in an effort to avoid triggering the proposed rule change’s requirements.
at Page 31 of the SEC Notice
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