FINRA fines five broker-dealers for wealth transfer failures
Advisors who set up accounts to ensure their clients’ heirs received money on a particular date might have found those plans undermined by their own broker-dealers.
FINRA fined LPL Financial, J.P. Morgan Securities, Morgan Stanley, Merrill Lynch and Citigroup for failing to ensure asset transfers on legally mandated dates for at least 80,585 accounts. Most of the failures — or 53,384 — came from Morgan Stanley. Merrill Lynch had the second-highest failure rate with 15,366. Collectively, the firms will pay $1.4 million in fines across separate cases, in amounts ranging from $200,000 to $300,000 each. The companies consented to FINRA's findings without admitting or denying the charges.
As baby boomers begin to move transfer trillions of dollars to their heirs through trusts or inheritance, “the wealth transfer issue is going to be significant” for the financial services industry in coming decades, says Benjamin Edwards, a professor of law and director of the Investor Protection Clinic at the University of Nevada in Las Vegas. FINRA may be focusing more attention towards these wealth transfers as a result, he predicts.
All five broke the rules governing accounts, which operate under the Uniform Transfer to Minors Act and the Uniform Gifts to Minors Act. Investors can skip the hassle and expense of setting up a formal trust by opening these accounts and managing assets on behalf of their beneficiaries. Recipients are legally required to take possession of funds upon reaching a certain age — often at 18 or 21.
In each case, the BDs continued to allow custodians to conduct transactions in those accounts after the transfer dates. They failed to adequately supervise the accounts and broke FINRA’s “Know Your Customer ” rule, the self-regulatory organization said in a release.
"This is essential to safeguarding customer assets,” the release says. “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."
For the other firms that were sanctioned, FINRA said supervisory lapses occurred in 5,249 accounts at LPL, 5,666 at J.P. Morgan Securities and 920 at Citigroup.
“We’ve enhanced our policies and procedures related to UTMA and UGMA accounts to comply with current requirements,” a J.P. Morgan Securities spokeswoman said in a statement.
FINRA did not respond to questions regarding potential customer harm resulting from the lapses. However, LPL said addressed the issue in a its statement. “This settlement is specific to our internal controls and does not relate to any case of investor harm. The majority of our UGMA and UTMA accounts involve parents or similar guardians providing money to children. We made proactive process enhancements over the summer to address these issues moving forward, including further supporting custodians’ obligations to manage trust terminations for [the] accounts.”
A Merrill Lynch spokesman declined comment. Citigroup and Morgan Stanley provided statements saying they are “pleased” to have put the matter behind them.
All firms, including smaller ones, should pay attention to this case, Edwards says.
“The enforcement action puts the entire industry on notice that they need to be on top of these wealth transfers,” he says.