FINRA Sanctions Five Firms for Failing to Reasonably Supervise Custodial Accounts

Firms Did Not Know Essential Facts About Customers With Custodial Accounts Established Pursuant to the Uniform Transfers to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA)

WASHINGTON – FINRA announced today that it has sanctioned five firms—Citigroup Global Markets Inc.; J.P. Morgan Securities LLC; LPL Financial LLC; Morgan Stanley Smith Barney LLC; and Merrill Lynch, Pierce, Fenner & Smith Incorporated—for failing to reasonably supervise compliance with FINRA Rule 2090, FINRA’s “Know Your Customer” rule.

FINRA Rule 2090 requires member firms and their associated persons to use reasonable diligence to determine the “essential facts” about every customer and “the authority of each person acting on behalf of such customer.” FINRA Regulatory Notice 11-02 stated that a firm must “know its customers not only at account opening but also throughout the life of its relationship with customers in order to, among other things, effectively service and supervise the customers’ accounts,” and that a firm should “verify the ‘essential facts’ about a customer … at intervals reasonably calculated to prevent and detect any mishandling of a customer’s account that might result from the customer’s change in circumstances.”

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. 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 over the custodial property to the beneficiary.  

The five firms that FINRA has sanctioned permitted customers to open UTMA and UGMA accounts, yet 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. As a result, UTMA 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 this 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, but consented to the entry of FINRA’s findings.

FINRA’s examination programs have identified a number of firms that have established effective practices appropriate to their circumstances for verifying the authority of custodians of UTMA/UGMA accounts. Investors and firms can obtain more information by reviewing FINRA’s 2019 Report on Examination Findings and Observations and Regulatory Notice 11-02.

About FINRA

FINRA is a not-for-profit organization dedicated to investor protection and market integrity. It regulates one critical part of the securities industry—brokerage firms doing business with the public in the United States. FINRA, overseen by the SEC, writes rules, examines for and enforces compliance with FINRA rules and federal securities laws, registers broker-dealer personnel and offers them education and training, and informs the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers a dispute resolution forum for investors and brokerage firms and their registered employees. For more information, visit www.finra.org.