FINRA FINES 5 BIG FIRMS FOR ‘KNOW YOUR CUSTOMER’ FAILURES
The Financial Industry Regulatory Authority (FINRA) sanctioned Citigroup Global Markets, J.P. Morgan Securities, LPL Financial, Morgan Stanley Smith Barney and Merrill Lynch for failure to ensure compliance with FINRA Rule 2090 “Know Your Customer” rule, dealing with custodial accounts. The Rule requires member firms and their associated representatives to use reasonable diligence to determine the “essential facts” about each customer and “the authority of each person acting on behalf of such customer.”
According to FINRA, the five firms paid a total of $1.4 million in fines, agreeing to a censure and review of their policies, systems and procedures to ensure adequate supervision of custodial accounts and to achieving compliance with FINRA Rule 2090. Additionally, the firms did not admit or deny the charges, but consented to the entry of FINRA’s findings.
Firms Must Verify Authority of Person Acting As Customer
According to Jessica Hopper, senior vice president and acting head of FINRA’s Department of Enforcement, ‘’FINRA Rule 2090 requires firms to verify the authority of any person purporting to act on behalf of a customer. It is essential to safeguarding customer assets—particularly in the case of UTMA and UGMA accounts, where 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,” she said in a statement.
Investors and firms can obtain more information by reviewing FINRA’s 2019 Report on Examination Findings and Observations and Regulatory Notice 11-02 for the list of firms that have established effective practices appropriate to their circumstances for verifying the authority of custodians of UTMA/UGMA accounts.
Broker-Dealers Must Know Customers
FINRA Regulatory Notice 11-02 stipulates that a firm must “know its customers not only at account opening but also throughout the life of its relationship with customers in order to, among other things, effectively service and supervise the customers’ accounts,” and “verify the ‘essential facts’ about a customer … regularly reasonably calculated to prevent and detect any mishandling of a customer’s account that might arise from the customer’s change in circumstances.”
