Five banking firms, namely J.P. Morgan Securities LLC, Citigroup Global Markets Inc, Morgan Stanley Smith Barney LLC, LPL Financial LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated, have all been hit with sanctions. These sanctions, done by the US Financial Industry Regulatory Authority, total to $1.4 million and concerns the companies’ collective failure to enact reasonable compliance supervision. In particular, surveillance in regards to the “Know Your Customer” (KYC) rules set up by FINRA.
No Confirmation Or Denial
The firms settled the matter with a combined payment of $1.4 million, further agreeing to review their procedures, policies, and systems to reasonably supervise custodial accounts. In doing so, the firms will comply with FINRA Rule 2090, preventing this from happening again. As is usual in such cases, no firm confirmed or denied any of the charges, only consenting to the findings done by FINRA.
Of the five firms, JPMorgan enjoyed the least hefty fine, totaling out to a massive $200,000. The other four companies had the displeasure of paying half more than that, with penalties totaling into a hefty $300 000.
Inadequate KYC Measures on Custodial Accounts
The official rulings by FINRA claimed that none of the five firms knew essential facts when it comes to customers that have custodial accounts established. Finra cited the Uniform Transfers to Minors Act (UTMA) as well as the Uniform Gifts to Minors Act (UGMA)
FINRA Rule 2090 mandates financial firms and the relevantly associated persons to make use of reasonable diligence. This is in regards to determining “essential facts” of customers and “the authority of each person acting on behalf of such customer,” according to FINRA. Furthermore, FINRA’s Regulatory Notice 11-02 states that the relevant firm must also know its concerned customers “not only in account opening but throughout the life of its relationship with customers.” FINRA cites this as needed “in order to, among other things, effectively service and supervise the customers’ accounts.” Thus, a firm must “verify the ‘essential facts’ about a customer.” The firms must do so at “intervals reasonably calculated to prevent and detect mishandling of a customer’s account that might result from the customer’s change of circumstances.”
About UTMA and UGMA
Both UTMA and UGMA accounts are, as one would expect, custodial accounts. These accounts allow methods to transfer property to a minor beneficiary without the usual need for a formal trust to facilitate it. Until the beneficiary reaches the age of majority, the custodian makes all investment decisions on behalf of them. When the age of majority is reached, the custodian is mandated by state law to transfer full control of the custodial property into the hands of the beneficiary.