Citigroup, LPL Financial And Others Fined for Failure To Supervise

Broker-Dealers Accused of Not Properly Supervising Custodial Accounts

The Financial Industry Regulatory Authority (FINRA) announced that it has fined five major firms $1.4M in total for not reasonably supervising custodial accounts. The broker-dealers are:

Citigroup (C), which will pay $300K.
Morgan Stanley Smith Barney (MS), which will pay $300K.
JP Morgan Securities (JPM), which will pay $200K.
LPL Financial (LPLA), which was fined $300K.
Merrill Lynch, Pierce, Fenner and Smith, which also was fined $300K.

The custodial accounts were set up under the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfer to Minors Act (UTMA).

UTMA and UGMA Accounts Involve Minor Beneficiaries

Accounts established under UGMA or UTMA let someone move property to a minor beneficiary without need of a trust.

FINRA said that while the firms let customers set up UGMA and UTMA accounts, which require a custodian to make investment decisions for that minor until they arrive at the age of majority—as dictated by the state—the broker-dealers did not set up, maintain, or enforce supervisory systems and procedures that were reasonable enough to be able to monitor whether these custodians would indeed transfer control of the custodial properties to the actual account beneficiaries when the time came.

The self-regulatory organization (SRO) contends that in failing to supervise these custodial accounts, the firms violated FINRA Rule 2090, often referred to as the “Know Your Customer” rule.

Rule 2090 mandates that brokerage firms employ reasonable diligence when knowing and maintaining key facts about customer accounts and how much authority a party acting for a customer is supposed to have.

This level of due diligence should last beyond the setting up of the account and run for the duration of the relationship. This means that firms need to periodically check to make sure no custodial accounts are being improperly handled.

FINRA believes that JP Morgan, LPL Financial, Citigroup, Morgan Stanley, and Merrill Lynch were unaware of essential facts pertaining to the customers that set up custodial accounts.

As a result of the firms’ failure to reasonably supervise, contend the SRO, there were custodians who were still making investment transactions even after beneficiaries had arrived at the age of majority and any custodial properties should have been transferred into their possession.

The firms have not denied or admitted to the SRO’s charges. However, they agreed to pay the fine, as well as to looking over their procedures, policies, and systems to make sure that they are designed in a manner reasonable enough to properly oversee and monitor custodial accounts while ensuring compliance with Rule 2090.

Failure to Properly Supervise

Our brokerage firm negligence lawyers at Shepherd Smith Edwards and Kantas (SSEK Law Firm) represent investors throughout the US whose broker-dealers neglected to properly supervise their accounts and the brokers or other authorized parties, including custodians, tasked with handling them.

Proper supervision requires not just monitoring of account activity but also making sure the reasonable systems and procedures are in place so that adequate oversight can happen.

Please contact SSEK Law Firm if you had a custodial account that you feel was improperly managed by a broker-dealer or you sustained any other losses that you suspect may have been due to inadequate supervision, fraud, or other negligence.