My brother-in-law changed the beneficiaries on all of his accounts from my sister to his children. I do not understand why, but I made all the changes as he requested because he is, after all, my client. Obviously, I have him as a client because of my sister.
Now, I fear for my sister's financial well being if something should happen to my brother-in-law. How can I reconcile my family loyalty and my client confidentiality concerns regarding these transactions?
This is a situation that is far too common in the securities brokerage industry. Serving family members and close friends (and any referrals from them) can be a lucrative business for many registered representatives. Not surprisingly, however, many reps also find themselves in the middle of disputes when family situations and personal relationships change.
@*BODY (Minion):In these matters, the rep's first loyalty is always to the client. Further, he may not disclose confidential customer information to anyone outside his or her firm without the client's approval, or under very limited circumstances, such as to regulators and/or pursuant to a court or administrative order. Similarly, most customers may change their securities account death beneficiary designation to anyone of their choosing, including, but not limited to, their spouse, significant other, children, sibling, parent, other relative, a charity or an unrelated third party, regardless of any personal relationship he may have with the former or future beneficiary.
In your case, concerns apparently relate to your brother-in-law's lack of an explanation for changing his death beneficiary designation from his sister to the brother-in-law's children. The rep, as a concerned brother or sister, is understandably anxious over the sister's future financial well being if the brother-in-law should pass away.
Nonetheless (and some may view this answer as cold-hearted), the rep's loyalty rests squarely with the client (brother-in-law), and not the sister. In this situation, the brother-in-law is the client and may make any change to the death beneficiary as he chooses. No exception exists in any federal, state or SRO statute, law, regulation, rule or policy to permit preferential treatment to family members over a client.
This answer could cause a family feud between the rep and the sister, if the sister discovers the change and reacts badly. But the result might be different in certain situations. For example, if the rep were aware that a court or administrative order existed forbidding the changing of beneficiaries, he could then refuse to change the designation for the brother-in-law because he would not be permitted to violate such an order. This scenario commonly occurs as a result of a divorce or separation proceeding. Further, if the sister or someone else was the co-owner of the account, the rep may require both account owners to approve the death beneficiary designation change. These situations, however, do not seem to be the case here.
Additionally, if he thought that the death beneficiary designation change was against the client's (brother-in-law's) best interest, for example, due to possible tax ramifications, the rep would have an obligation to raise this issue with the client, but the client still has the final say in any change. If the rep believes the change is not in the client's best interests, he should also notify his branch manager and/or compliance department about the issue and maintain a factual record of the matter, in case he is later questioned on the change. Again, however, in this case, there doesn't appear to be any indication that the change in beneficiary status from the sister to the children raises any concern as it relates to the client's best interests.
Although business from family members and friends may present very rewarding opportunities, these accounts can also create much anxiety when things do not go well. Registered reps should follow their instincts, and remember “the customer is always right” rule in these situations despite the existence of any family or personal relationship.
Saiber Schlesinger Satz & Goldstein
You already have a problem.
If you are certain that you (and by extension, your firm) owe absolutely no legal duty to your sister, then the answer is simple: You have a duty of confidentiality, and the fact that you suddenly have a strong desire to violate that duty doesn't give you the legal right to do so.
Your only alternative to carrying out your client's instructions and remaining silent would be for you and your firm to resign and allow the brother-in-law to move the account elsewhere. In the process, you might actually give your sister the heads-up that something is amiss.
But you can't rule out the possibility that you may, indeed, have legal duty to your sister. Such a duty could arise under various circumstances:
If your sister and brother-in-law live in a community property state, your sister may have a community property interest in some part or even all of your brother-in-law's account.
Even if they do not live in a community property state, how confident can you be that your sister has no rights to the account assets under their state's marital property laws?
Even if your sister has absolutely no legal rights to the brother-in-law's account, you and your firm still may have legal duties to her arising out of either:
a) an unrelated account that she may have with you or your firm, or
b) a relationship of trust and confidence between you and your sister. In other words, if your sister has looked to you for advice on financial matters, you may owe her a duty of due care or even a fiduciary duty.
If you have a duty to your sister, and you learn of matters that have a potentially devastating impact on her financial security, you and your firm have a duty to tell her. But if you do, you will violate any duty of confidentiality that you and your firm have to your brother-in-law. And, so, here you have a classic conflict of interest.
You and your firm are in the same position. If you breach your duty to a client, you and your firm both are liable. In fact, in California, at least, your firm would have a duty to indemnify you against any liability to either party.
What to do? You need to coordinate with your firm and its legal counsel in determining a course of action. Perhaps the firm's counsel, after analyzing the problem thoroughly, might arrange for a meeting between your branch manager and your brother-in-law to discuss the problem and try to work out a solution. Maybe the result will be good news — that your sister and brother-in-law already have seen to her needs and the beneficiary changes will not hurt her. In any event, don't act in haste. That could cause new problems or worsen existing ones. And don't go it alone — talk to your branch manager and the firm's counsel.
Scot Bernstein, Esq.
Mather Field, Calif.
The Ethical Rep is our monthly column through which more than 30 prominent securities industry attorneys, experts and law school professors answer questions you, our readers, send anonymously to us.
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