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FINRA Fines Five Broker-Dealer Firms for Failure to Adequately Supervise Wealth Transfers

On December 26, 2019, FINRA sanctioned five firms, LPL Financial LLC, J.P. Morgan Securities LLC, Morgan Stanley Smith Barney LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Citigroup Global Markets Inc., for failing to ensure asset transfers on legally mandated dates for at least 80,585 accounts. 53,384 of the accounts came from Morgan Stanley and 15,366 accounts came from Merrill Lynch; while, 5,666 accounts were at J.P. Morgan Securities, 5,249 accounts were at LPL, and 920 accounts were at Citigroup.


Accounts operating under the Uniform Transfers to Minors Act (UTMA) and the Uniform Gifts to Minors Act (UGMA), allow customers to transfer funds to a minor beneficiary without creating a formal trust. In these accounts, a custodian conducts investments on behalf of the beneficiary, until the beneficiary reaches the age of majority, at which point the account is transferred from the custodian to the beneficiary. The five firms failed to follow the rules governing these wealth transfers, by allowing the custodians to conduct transactions in the accounts after the accounts were transferred to the beneficiaries.


FINRA requires firms to “know your customer,” by verifying the authority of any person acting on behalf of a customer. Following the “Know Your Customer” (KYC) rule requires firms to implement supervisory systems to verify custodian authority to make investment decisions in the accounts. The five firms failed to adequately supervise the accounts and therefore failed to follow FINRA’s KYC rule.


The firms consented to FINRA’s findings, but did not consent to or deny the charges. The five firms will pay combined fines of $1.4 million. These enforcement actions by FINRA put the industry on notice of the importance of increasing supervision of these wealth transfers.


In an issued statement, J.P. Morgan stated that they have enhanced their policies and procedures for UTMA and UGMA accounts. Citigroup and Morgan Stanley reported in statements that they are “pleased” to have put this matter behind them. Merrill Lynch declined to respond on this matter.


The attorneys at Lax & Neville LLP have extensive experience in successfully prosecuting claims on behalf of customers who have suffered losses as a result of investment and securities fraud. Additionally, attorneys at Lax & Neville are experienced with employment law in the financial services industry, and dealing with regulatory bodies such as the SEC. If you are a victim of fraud or are a Financial Advisor or Broker-dealer with a prospective regulatory issue, please contact Lax & Neville LLP today at (212) 696-1999 to schedule a consultation.

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