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FINRA Sanctions Five Wall Street Firms $1.4 Million For Failure to Properly Monitor Minor Accounts

FINRA Sanctions Five Wall Street Firms $1.4 Million For Failure to Properly Monitor Minor Accounts

Five large brokerage firms have been fined $1.4 million by FINRA for failing to reasonably supervise custodial accounts.

Five large brokerage firms have been fined $1.4 million by FINRA for failing to reasonably supervise custodial accounts. The sanctioned 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 companies paid a combined $1.4 million to settle the matter and agreed to review their policies, systems, and procedures to ensure their account supervision is in compliance with FINRA rules. The firms neither denied nor admitted to the charges.

FINRA said it sanctioned the firms for failing to supervise Uniform Transfer to Minors Act (UTMA) and Uniform Gift to Minors Act (UGMA) custodial accounts that provide a way for folks 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.

FINRA’s position is that the sanctioned firms were deficient in monitoring whether the transfers were done in a correct and timely manner. 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.

It is possible that these types of accounts are fairly old and therefore have grown to have significant assets. Then the child reaches the age of majority where the assets legally become their assets and the trust creator or trustee fails to take the required action to inform the beneficiary and transfer control of the assets to the trust’s beneficiary.

It is generally held that brokers and advisors have an obligation to know their customer, even when the customer automatically replaces the customer who established the account years before. A failure occurs when the broker/advisor fails to provide better counsel to the customer who created the trust and also fails to work with the beneficiary to understand the real value of the assets they receive over the long term. Another failure is the brokerage and advisory firms’ failure to supervise. Computers can monitor the date – when it arrives or in advance – when the beneficiary is to become the actual customer and owner of the account.

Each transaction that occurs beyond the age of majority is an unauthorized discretionary trade, and each day represents a breach of fiduciary duty on behalf of the trustee, the broker, and the brokerage firm. This can bring about liability in these situations.

Starr Austen & Miller has been representing investors for nearly 40 years. Contact us for a free, no obligation consultation.

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