Some broker-dealers and registered representatives are continuing to make transactions and hold on to accounts set up for minors years after they reach majority age, according to examiners for the Financial Industry Regulatory Authority.
A report released Wednesday by Finra examiners found that both firms and reps were found to flagrantly flout the rules for accounts set up under the Uniform Transfers to Minors Act (UTMA) and the Uniform Gifts to Minors Act (UGMA). These accounts allow parents, grandparents and others to gift assets to a minor.
The custodial accounts carved out by the two laws allow adults to name someone (including themselves) as account custodians. However, generally when such accounts are established, the minor (beneficiary) becomes the owner of the assets. The custodian manages and invests the property on the beneficiary’s behalf until she or he comes of age (generally at age 18 or 21), at which point the firm is required to transfer the custodial property to the beneficiary.
What could go wrong? In some instances, “firms permitted custodians to effect transactions in, and withdraw, journal and transfer money from UTMA/UGMA accounts months, or even years, after the beneficiaries reached the age of majority, and ignored red flags of such activity, including customer complaints relating to such transactions,” Finra said.
Examiners found that many firms were aware of the need to transfer responsibility for the account at a future date since they had policies and procedures addressing it (like noting at the time the account was set up when the child would come of age). However, some firms “did not take any steps to track or monitor when beneficiaries would reach the age of majority,” according to the report.
“Other firms had procedures for their registered representatives to follow, but did not require any supervisory oversight,” the examiners found.
Other firms failed entirely to establish, maintain or enforce a supervisory system “reasonably designed to achieve compliance with their continuing obligation to know the essential facts of their UTMA/UGMA Account customers.”
As a result, broker-dealers that failed to transfer ownership and continued to make transactions were in violation of know-your-customer and suitability rules, which require firms to verify 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.”
On a positive note, the Finra examiners found that some firms handled such accounts well, implementing a number of effective practices for verifying the authority of custodians for the accounts created under the uniform laws. Such firms:
- Automatically tracked clients’ age of majority: They maintained supervisory systems that use automated tools to track when each UTMA/UGMA account beneficiary had reached the age of majority.
- Notified custodians: The firms issued letters or provided notifications to custodians to advise them that beneficiaries were approaching the age of majority and informed them about upcoming transfers of custodial property in their UTMA/UGMA accounts, as well as any restrictions to the custodians’ trading authority after the beneficiaries reached the age of majority.
- Notified registered representatives. The firms maintained systems to provide registered representatives with automated alerts when beneficiaries reached the age of majority and required them to communicate with the custodian about the transfer of custodial property, Finra said.