A registered representative (RR) is informed by a client that they are considering naming their RR as the beneficiary of a significant portion of their individual retirement account (IRA). The client has no close family members and views the RR as a trusted friend and advisor. What is the most appropriate action for the RR to take regarding this request?
- AAccept the designation but immediately transfer the client to another RR to avoid conflict.
- BAccept the designation, as it reflects the client's wishes and trust.
- CDecline the designation and explain that firm and regulatory rules prohibit such arrangements.
- DAccept the designation only if the firm provides explicit written approval.
Show answer & explanationAnswer & explanation
Correct answer: C. Decline the designation and explain that firm and regulatory rules prohibit such arrangements.
FINRA Rule 3241 (Prohibition on Being Named a Customer's Beneficiary or Holding a Position of Trust) generally prohibits RRs from being named as a beneficiary to a customer's estate or holding a position of trust (like executor or trustee) unless specific conditions are met, such as the customer being a family member or the firm provides written approval under very limited circumstances. Given this is a non-family client, the RR should decline the request.
Why the other options are wrong
- A. Transferring the client does not resolve the ethical and regulatory issue of the RR being named beneficiary.
- B. Accepting would violate FINRA rules designed to prevent conflicts of interest and exploitation of clients.
- D. While firm approval is required for any exceptions, it is highly unlikely to be granted for a non-family client, and the general rule is prohibition.
Beneficiary Designation Prohibition (Non-Family)
FINRA Rule 3241 generally prohibits registered representatives from being named as a beneficiary of a non-family customer's estate or account, or from holding a position of trust (e.g., executor, trustee) for such a customer, to prevent conflicts of interest and potential exploitation.
- Protects vulnerable clients.
- Prevents conflicts of interest.
- Family member exception exists with firm approval.
Memory trick: Beneficiary? No, unless family, then firm says go.