FINRA Hits Five Firms for Same KYC Supervisory Failure
2 January 2020: The US Financial Industry Regulatory Authority took action against Citigroup Global Markets, JP Morgan Securities, LPL Financial, Morgan Stanley and Merrill Lynch for failing to reasonably supervise compliance with the Know Your Customer (KYC) rule 2090, when dealing with custodial accounts. KYC requires firms to use reasonable diligence to determine the essential facts about each customer and the authority of each person acting on behalf of such a customer. The firms paid a cumulative total of $1.4m in fines and will review their policies, systems and procedures to ensure that they are reasonably designed to supervise custodial accounts and to achieve compliance.
The firms allowed clients to open accounts under the Uniform Transfers to Minors Act and Uniform Gifts to Minors Act but did not establish, maintain and enforce reasonable supervisory systems and procedures to track or monitor whether custodians transferred control over custodial property to UTMA and UGMA account beneficiaries in a timely way. This meant that UTMA account custodians authorized transactions in UTMA accounts months or even years after the beneficiaries reached the age of majority and after the custodians were obligated to transfer the custodial property.
These custodial accounts provide a way to transfer property to a minor beneficiary without the need for a formal trust, allowing the custodian to make all investment decisions on behalf of the beneficiary until he/she hits the age of majority, at which point the custodian is required to transfer control of the custodial property to the beneficiary.
The fine total was comprised of Citigroup, Merrills, Morgan Stanley and LPL all paying $300,000, with JP Morgan paying $200,000.