FINRA Sanctions Firms for Custodial Account Violations

According to a late December press release, FINRA sanctioned five large broker-dealers for supervisory-related violations concerning custodial accounts such as UGMAs and UTMAs. Each firm was fined (either $200,000 or $300,000, censured, and required to review their policies and systems/procedures to ensure that they are appropriate.

The issue in the cases concerned allowing the custodian of the accounts to continue to operate as custodian and authorize transactions in the accounts even after the beneficiary (a former minor-child) had reached the age of majority and the control of the assets should have then fully vested with the beneficiary. FINRA charged the cases as a violation of FINRA Rule 2090, which is the “know your customer” rule. In part, the rule requires that a firm use reasonable diligence in the maintenance of an account to know, “[t]he authority of each person acting on behalf of such customer.” According to the press release, Jessica Hopper of FINRA stated that, “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.”

Other firms may be wise to evaluate their procedures and supervisory systems now with respect to verifying authorized agents of UGMA and UTMA accounts after the beneficiary has reached the age of majority.

Read FINRA’s press release here, and also find links to each individual action.