Articles Posted in Failure to Supervise

The Uniform Transfers to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA) allow adults to give or transfer assets to minor beneficiaries. The slight difference between the accounts is that the UGMA is limited to financial assets while the UTMA includes any tangible or intangible assets. These accounts allow children to safely invest and build up capital legally before they become adults. There are also tax benefits to these accounts as contributions are made with after-tax dollars. If you believe your brokerage firm failed to supervise your trust account or the advisor managing your trust, you need to consult a New York Failure to Supervise Trusts Law Firm like Malecki Law.

Each of these accounts have a custodian who acts in the child’s interest as a fiduciary. This means that the investments made and the way the money in the accounts is managed must be for the child’s benefit. When the minor reaches the age of majority, the custodian no longer has authority to make decisions on behalf of the beneficiary and the beneficiary continues to monitor the account on their own. Additionally, once the money is transferred to the beneficiary, it is permanently their property.

FINRA Rule 2090, the “Know your Customer” rule, requires firms “verify the authority of any person purporting to act on behalf of the customer. So, brokerage firms and their members are supposed to know the essential details about who is acting on behalf of the customer (i.e. the custodian). Did your brokerage firm fail to “know” your custodian? Did you suffer losses because of this? You should reach out to a New York Failure to Supervise Trusts Lawyer like the lawyers at Malecki Law for a free consultation. The member must not only know the customer at the beginning of their relationship (account opening) but throughout the whole of the relationship. In line with this “Know your Customer” rule, firms are supposed to have a supervisory system for their members, which makes sure brokers are in compliance with procedures. The problem is that many firms do not have supervisory procedures in place for UT/UGMAs. In turn, the brokers do not know their customers, resulting in custodians not being monitored.

Brokerage firms owe its clients the duty to supervise its employees and personnel. This is a very important duty in the financial industry, as it ensures the associated persons under the brokerage firm’s umbrella are compliant with FINRA’s rules. Firms should maintain its duty to supervise, and ensure that it has adequate procedures in place to prevent any potential misconduct that would be harmful to its clients. If your brokerage firm had inadequate supervisory procedures in place, the firm may be subject to failure to supervise claims. You need a New York Securities Industry Lawyer like the lawyers at Malecki Law.

A faulty compliance system can rise to the level of a failure to supervise. Broker-dealer Joseph Stone Capital (JSC) apparently dealt with exactly that. FINRA found that the firm’s compliance system had been insufficient in supervising its brokers, from January 2015 through June 2020. Specifically, JSC received exception reports that revealed potential excessive trading red flags. However, JSC failed to further investigate or prevent such activity.

To prevent this problem from occurring, a JSC supervisor responsible for reviewing the exception reports should have reviewed the clearing firm’s exception report daily. That supervisor would have discovered the possibility of excessive trading. If your brokerage firm failed to further investigate or prevent misconduct like JSC, it may be prone to failure to supervise claims. You need a Regulatory Defense Law Firm in New York, like Malecki Law. Additionally, after discovering these excessive trades, management should have questioned the broker about this trading activity, instead of restricting commissions. Supervisors should have reviewed every trade confirmation in the accounts in question and evaluated whether the trades were solicited (where the broker recommended the trade) or unsolicited (where the client recommended the trade). If the confirmations stated “solicited”, then management could ask for the broker’s thought process for making these trades. This would have identified the crux of the issue more efficiently and would have led to a quicker resolution. One can argue that JSC should improve its compliance software, but the software was not truly at issue during this investigation. According to all evidence, the compliance software seemed to work. The FINRA Order shows that the problem truly stemmed from JSC’s supervisors’ failure to act accordingly to stop their brokers’ activities of excessive trading. If your brokerage firm failed to act accordingly when discovering potential broker misconduct, it may be susceptible to failure to supervise claims. You need a Regulatory Defense Attorney in New York, like the lawyers at Malecki Law. It is unclear how JSC’s compliance software works, but they could also look to incorporate artificial intelligence and machine learning to generate quicker and more accurate compliance reports.

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