FINRA Fines Five Firms $1.4 Million for Failing to Reasonably Supervise Custodial Accounts
The Financial Industry Regulatory Authority has fined five broker-dealers a total of $1.4 million for failing to properly monitor custodial accounts established under the Uniform Gifts to Minors Act (UGMA) and/or the Uniform Transfers to Minors Act (UTMA) to ensure the assets were transferred to beneficiaries once they came of age.
The Financial Industry Regulatory Authority has fined five broker-dealers a total of $1.4 million for failing to properly monitor custodial accounts established under the Uniform Gifts to Minors Act (UGMA) and/or the Uniform Transfers to Minors Act (UTMA) to ensure the assets were transferred to beneficiaries once they came of age. FINRA claims that the firms violated FINRA Rule 2090, its “know your customer” rule.
The broker-dealers include LPL Financial, J.P. Morgan Securities, Merrill Lynch, Morgan Stanley Smith Barney, and Citigroup Global Markets. Each were censured and fined $300,000, except for J.P. Morgan Securities, which was fined $200,000.
UTMA and UGMA accounts are custodial accounts that provide a way to transfer property to a minor without the need for a formal trust. While the specific requirements and features of the accounts may vary from state to state, all share certain common characteristics.
For example, in all states, in order to establish an UTMA account, the donor appoints a custodian, designates a minor beneficiary, and deposits assets into the account. Once a donor contributes assets to the account, the assets become the property of the minor beneficiary, and neither the donor nor the custodian can divest the beneficiary of the donated assets.
The custodian makes all investment decisions on the beneficiary’s behalf until the beneficiary reaches the age of majority at which point the custodian is required by state law to transfer control to the beneficiary.
According to letters of acceptance, waiver and consent issued by FINRA, the firms failed to establish procedures related to the custodians’ obligation to timely transfer control over the custodial property to the beneficiary.
FINRA claims that account custodians authorized transactions in UTMA accounts months, or even years, after the beneficiaries reached the age of majority and after the custodians had become obligated to transfer the custodial property.
“FINRA Rule 2090 requires firms to verify the authority of any person purporting to act on behalf of a customer,” said Jessica Hopper, senior vice president and acting head of FINRA’s department of enforcement. “This is essential to safeguarding customer assets—particularly in the case of UTMA and UGMA accounts, where it is essential for firms to implement supervisory systems reasonably designed to verify custodians’ authority to make investment decisions after the account beneficiaries reach the age of majority.”
In settling the matter, the five firms paid combined fines totaling $1.4 million, and agreed to review their policies, systems, and procedures to ensure that they are reasonably designed to supervise custodial accounts and to achieve compliance with FINRA Rule 2090. The firms neither admitted nor denied the charges.
