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Regulation and Compliance > Federal Regulation > FINRA

FINRA Fines 5 Big Firms for ‘Know Your Customer’ Failures

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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.

J.P. Morgan Securities, meanwhile, has “enhanced our policies and procedures related to UTMA and UGMA accounts to comply with current requirements,” a company spokeswoman said.

Citigroup was “pleased to have this matter resolved,” a spokesman said. Similarly, Morgan Stanley said in a statement that it was “pleased to have resolved this matter, which related to an industry-wide review and subsequent settlements.” Merrill Lynch declined to comment.

FINRA accepted a letter of acceptance, waiver and consent from each of the five firms Thursday, but each of the five firms had signed its letter on a different date.

Citigroup was the first of the five firms to sign its letter, Oct. 28, and agreed to pay a $300,000 fine. LPL signed its letter next, Oct. 30, and also agreed to pay a $300,000 fine. J.P Morgan signed its letter Nov. 26 and agreed to a $200,000 fine. Merrill Lynch signed its letter on Nov. 26 also, but agreed to a $300,000 fine. Morgan Stanley signed its letter Dec. 2 and agreed to pay $300,000.

“FINRA Rule 2090 requires firms to verify the authority of any person purporting to act on behalf of a customer,” according to 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,” she said in a statement.

FINRA’s examination programs, meanwhile, 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,” it said. Investors and firms can obtain more information by reviewing FINRA’s 2019 Report on Examination Findings and Observations and Regulatory Notice 11-02, it pointed out.

FINRA Regulatory Notice 11-02 states 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.”


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