FINRA, the Financial Industry Regulatory Authority, punished several industry heavyweights for non-compliance with their “know your customer” rule. FINRA announced the action against: Citigroup Global Markets Inc.; J.P. Morgan Securities LLC; LPL Financial LLC; Morgan Stanley Smith Barney LLC; and Merrill Lynch, Pierce, Fenner & Smith Incorporated.
FINRA announced the action against: Citigroup Global Markets Inc.; J.P. Morgan Securities LLC; LPL Financial LLC; Morgan Stanley Smith Barney LLC; and Merrill Lynch, Pierce, Fenner & Smith Incorporated.
FINRA said all five firms violated its “know your customer” rule which states, “firms to use ‘reasonable diligence,’ in regard to the opening and maintenance5 of every account, to know the ‘essential facts’ concerning every customer. The rule explains that ‘essential facts’ are ‘those required to (a) effectively service the customer’s account, (b) act in accordance with any special handling instructions for the account, (c) understand the authority of each person acting on behalf of the customer, and (d) comply with applicable laws, regulations, and rules.’”
In the case of these firms, FINRA stated that they violated the rule regarding the Uniform Gift to Minors Account (UGMA).
FINRA explained further in its press release, “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.”
“FINRA Rule 2090 requires firms to verify the authority of any person purporting to act on behalf of a customer,” said 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.”
The firms paid a total of $1.4 million in fines and, “agreed 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,” according to the release.
As part of the agreement, the five firms neither admitted or denied the charges, though they paid the fines along with taking corrective action.
Rule 2090 is the “know your customer” rule.
FINRA a self-regulatory organization and was formed in 2007 when the regulatory arms of the NYSE and the NASD merged.
