Document ID: SEC-2020-1618-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2020-10-14T04:00Z

[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]

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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.
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    \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 http://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.
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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\
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    \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.
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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\
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    \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.
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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\
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    \13\ Id.
    \14\ Id.
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    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\
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    \15\ Notice at 41251.
    \16\ Id.
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    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\
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    \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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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\
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    \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.
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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\
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    \21\ Notice at 41252.
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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.
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    \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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    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\
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    \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).
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    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\
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    \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.
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    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.
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    \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.
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    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\
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    \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.
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    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\
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    \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.
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    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\
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    \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.
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    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\

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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