Finra is warning member firms to ensure they don’t allow custodians to withdraw funds from certain accounts held in custody on behalf of minors.
Uniform Transfers to Minors Act and Uniform Gifts to Minors Act accounts allow for the transfer of property to a minor beneficiary without resorting to a formal trust. Account custodians make investment decisions on the beneficiaries’ behalf until they reach the age of majority, when the custodian must transfer the property to them, the regulator notes.
In a notice published last week, the industry’s self-regulator says its examination turned up several companies that fail to have reasonable procedures for determining who has authority over such accounts close to the time that beneficiaries reach the relevant age.
Additionally, some firms have allowed custodians to withdraw or transfer funds months or even years after the termination of the custodianship, Finra found. And several firms have failed to act, despite red flags — namely, customer complaints, according to the notice.
Finra recommends that firms have systems in place to track custodianship termination, including automated tools that notify registered representatives in periods leading up to when beneficiaries reach the relevant age. Aside from setting up such alerts, firms can require that representatives notify custodians about the upcoming transfer. In addition, the regulator suggests that member firms contact custodians about upcoming custodianship terminations and steps they may need to take, according to the regulatory notice.
After beneficiaries reach the relevant age, firms should verify whether custodians have the authority to engage in transactions in such accounts, Finra notes. Custodians that do not should be automatically blocked.
Finra’s warning comes on the heels of a settlement the regulator reached with five leading brokerages over alleged failures in their supervisory systems related to UTMAs and UGMAs. In December, Merrill Lynch, Morgan Stanley, JPMorgan, LPL Financial and Citigroup agreed to collectively pay $1.4 million in fines over alleged failures to ensure that custodians transferred control to beneficiaries in a timely manner.
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