Uniform Transfers to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA) custodial accounts provide a way to transfer property to a minor beneficiary without the need for a trust. The custodian then must transfer the ownership of this account to the minor at the age of majority.
There are often many misconceptions related to establishing and maintaining UTMA and UGMA custodial accounts. A news release from FINRA provides guidance related to its sanctions of five firms that had several supervisory failures related to this line of business. Below are a few key takeaways and lessons learned.
Transfer UTMA and UGMA Custodial Accounts Timely
Citigroup Global Markets Sanction (CGMI) was aware of changes in the account, but it still allowed at least 920 UTMA transactions after the beneficiary reached the age of majority. To avoid this, firms must establish a process to transfer the account and ensure that this process takes place in a timely manner.
Establish and Maintain Policies and Procedures for Custodial Accounts
Morgan Stanley Smith Barney LLC (MSSB) had a process in place before the merger between Morgan Stanley and Smith Barney in 2012. The process including sending “Compulsory Alerts” to representatives responsible for the accounts with a stated timeframe of 30 to 90 days before the minor reached the age of majority. The Firm would also restrict accounts that were not properly transferred. Unfortunately, this policy did not carry over following the merger. Prior to executing a merger, it is important to consider all policies of each firm. This will help ensure that the policies of one firm that do not exist at the other do not fall through the cracks.
Implement Controls to Enforce Policies and Procedures
J.P. Morgan Securities LLC (JPMS) had policies and procedures that described the account features, conversion aspects, and account opening process. The firm’s account opening procedures stated that each UTMA account title must include the state under which the custodianship was established. Additionally, Merrill Lynch (Merrill) had policies in place that requiring the custodian to submit a Letter of Resignation once the beneficiary reached the age of termination. The beneficiary could continue to use the same account or open a new one.
Both firms had written supervisory procedures (WSPs) in place in regards to UTMA and UGMA custodial accounts. However, neither firm followed their procedures to make timely transfers. The takeaway here is very important: WSPs without controls in place to enforce them will result in a FINRA Rule 3110 violation.
Know Your Customer
FINRA Rule 2090 requires firms to know the essential facts about their customers. Although LPL Financial LLC (LPL) had policies in place and they were aware of changes within the UTMA account, they continued to allow transactions. Essential facts of a customer are necessary to properly service and supervise a customer account. For example, this could include the date of birth and the date that the beneficiary reaches the age of majority. Opening the account is not a one-and-done occurrence. Firms must have a system to interpret what additional information the firm should collect and how this information may affect the service of the account.
If you want to learn more about best practices on how to establish an effective compliance program with controls in place to steer clear of FINRA’s sweeps related to UTMA and UGMA custodial accounts, please contact our expert team of compliance professionals.
