Finra Fines Merrill, Morgan Stanley, Three Others Over UTMAUGMA Accounts

28 Dec    Investing News

The Financial Industry Regulatory Authority fined five large brokerage firms for failing to properly supervise transfers of custodial accounts to beneficiaries in violation of its ‘know your customer’ rule, the regulator said on Thursday.

Between 2014 and 2018, Citigroup Global Markets, J.P. Morgan Securities, LPL Financial, Morgan Stanley Smith Barney and Merrill Lynch, Pierce, Fenner & Smith did not properly monitor custodial UTMA and UGMA accounts to ensure that assets were transferred from custodians to  beneficiaries once minor beneficiaries came of age.

The five firms agreed to pay combined fines totaling $1.4 million and to review their policies, systems, and procedures to ensure they are reasonably designed to supervise custodial accounts and comply with Rule 2090, the regulator said.

Property subject to the Uniform Transfers to Minors Act and the Uniform Grants to Minors Act can be donated to a minor beneficiary without the need for a formal trust, but must be transitioned to the beneficiary at the age required by state laws. In some cases, the firms allowed property to be controlled by custodians “months, or even years, after the beneficiaries reached the age of majority,” according to letters of acceptance signed by each of them.

The ‘know your customer’ rule requires firms and brokers to verify the ‘essential facts’ about a customer at regular intervals “reasonably calculated to prevent and detect any mishandling of a customer’s account that might result from the customer’s change in circumstances.”

The five firms each settled the charges without admitting or denying the findings.

Finra flagged UTMA/UGMA tracking as a key examination concern in October, noting that some firms had failed to ignored red flags, including customer complaints, about custodial controls.

“”FINRA Rule 2090 requires firms to verify the authority of any person purporting to act on behalf of a customer,” Jessica Hopper, Finra’s acting enforcement head, said in a prepared statement.  “This is essential to safeguarding customer assets—particularly in the case of UTMA and UGMA accounts….”

Citigroup, LPL, Morgan Stanley and Merrill Lynch agreed to pay $300,000 each while J.P. Morgan was fined $200,000, according to the letters of acceptance signed by the firms.

“We’ve enhanced our policies and procedures related to UTMA and UGMA accounts to comply with current requirements,” a J.P. Morgan spokeswoman said in a statement.

Spokespeople for Citi and Morgan Stanley said in emailed statements that they are pleased to have resolved the matter.

A spokesman for LPL, the largest independent broker-dealer with more than 16,000 independent contractors, said the firm remains “focused on effective compliance practices that protect our advisors and their investors.”

A Merrill Lynch spokesman declined to comment.

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