FINRA sanctions Citi, JPMorgan, LPL Financial, Morgan Stanley Smith Barney, and Merrill Lynch

The United States Financial Industry Regulatory Authority (FINRA) today announces that it has sanctioned Citigroup Global Markets Inc.; J.P. Morgan Securities LLC; LPL Financial LLC; Morgan Stanley Smith Barney LLC; and Merrill Lynch, Pierce, Fenner & Smith Incorporated, over the firms’ failure to reasonably supervise compliance with FINRA’s “Know Your Customer” rule.

In settling this matter, the five firms paid combined fines totaling $1.4 million, 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. The firms neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

The fines are:

• J.P. Morgan Securities LLC – $200,000;
• Merrill Lynch, Pierce, Fenner & Smith Incorporated – $300,000;
• LPL Financial LLC – $300,000;
• Citigroup Global Markets Inc – $300,000;
• Morgan Stanley Smith Barney LLC – $300,000.

According to FINRA, the five firms did not know essential facts about customers with custodial accounts established pursuant to the Uniform Transfers to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA).

FINRA Rule 2090 requires member firms and their associated persons to use reasonable diligence to determine the “essential facts” about every customer and “the authority of each person acting on behalf of such customer.” FINRA Regulatory Notice 11-02 stated that a firm must “know its customers not only at account opening but also throughout the life of its relationship with customers in order to, among other things, effectively service and supervise the customers’ accounts,” and that a firm should “verify the ‘essential facts’ about a customer … at intervals reasonably calculated to prevent and detect any mishandling of a customer’s account that might result from the customer’s change in circumstances.”

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, but 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. Due to this, 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.

The firms neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.