FINRA Sanctions 5 Firms for Failing to Reasonably Supervise Accounts


FINRA, before the New Year 2020, sanctioned five major financial firms who failing to reasonably supervise custodial accounts. These five firms were: Citigroup Global Markets Inc.; J.P. Morgan Securities LLC; LPL Financial LLC; Morgan Stanley Smith Barney LLC; and Merrill Lynch, Pierce, Fenner & Smith Incorporated. The violation was of FINRA Rule 2090, known as FINRA’s “Know Your Customer” rule. This rule states “Every member shall use reasonable diligence, in regard to the opening and maintenance of every account, to know (and retain) the essential facts concerning every customer and concerning the authority of each person acting on behalf of such customer.”

For FINRA, this basically means that these companies must of course know the identity of someone who is opening an account with them, but must also, at appropriate intervals, take steps to verify that that account owner is still in fact the person that they believe it to be.

To explain the sanction in question, FINRA shares:

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.

This is something that many investors may be interested in, as protecting their accounts for their families is very important. While the five companies did not admit to any guilt, they agreed to a combined $1.4 million in penalties and to change their policies to ensure better protection for its customers.

This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship.  Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
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