The Financial Industry Regulatory Authority sanctioned Citigroup Global Markets, J.P. Morgan Securities, LPL Financial, Morgan Stanley Smith Barney and Merrill Lynch for failing to reasonably supervise compliance with FINRA Rule 2090, its "Know Your Customer" rule, when dealing with custodial accounts, FINRA said Thursday.
FINRA Rule 2090 requires member firms and their associated representatives to use reasonable diligence to determine the "essential facts" about each customer and "the authority of each person acting on behalf of such customer."
To settle the matter, the five firms paid a total of $1.4 million in fines and agreed to a censure and 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, FINRA said.
As part of the settlements, the firms did not admit or deny the charges, but consented to the entry of FINRA's findings.
The firms permitted customers to open accounts under the Uniform Transfers to Minors Act and Uniform Gifts to Minors Act but "failed to establish, maintain and enforce reasonable supervisory systems and procedures to track or monitor whether custodians timely transferred control over custodial property to UTMA and UGMA account beneficiaries," FINRA claimed.
As a result, UTMA account custodians authorized transactions in UTMA accounts months, or sometimes even years, after the beneficiaries reached the age of majority and after the custodians had become obligated to transfer the custodial property, FINRA said.
UTMA and UGMA accounts are custodial accounts that provide a way to transfer property to a minor beneficiary without the need for a formal trust, FINRA pointed out. The custodian makes all investment decisions on behalf of the beneficiary until that beneficiary hits the age of majority, at which point the custodian is required by state law to transfer control of the custodial property to the beneficiary, FINRA explained.
"We continue to enhance our controls to support custodians' obligations to manage trust termination of UGMA and UTMA accounts," LPL spokesman Jeffrey Mochal told ThinkAdvisor Thursday. "We remain focused on effective compliance practices that protect our advisors and their investors," he added.
