Know Your Custodian – Uniform Transfers and Gifts to Minors Acts

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.

In 2019, FINRA sanctioned five firms for failing to supervise compliance with FINRA’s “Know your Customer” rule. The firms sanctioned were large, such as Citigroup, J.P. Morgan, LPL Financial, Morgan Stanley, and Merrill Lynch. This shows how prevalent this issue is, as it is not just small, unknown firms that don’t have these procedures, but some of the most well-known, respected brokerage firms in the world. These firms allowed customers to open UTMA and UGMA accounts but did not have policies and procedures to monitor when control of the account should be switched from the custodian to the beneficiary. So, the custodians of these accounts continued to have control over their children’s accounts even when they reached the age of majority. The control of the custodians did not just continue for a couple of weeks but for months or years! If you are a beneficiary of a UTMA/UGMA account that feels they have fallen victim to the aforementioned misconduct, you should have a Failure to Supervise Trusts Attorney in New York, like the attorneys at Malecki Law, review your portfolio for free.

The amount of time that these custodians went unmonitored demonstrates how little attention firms had on supervising their brokers throughout use of these UTMA and UGMA accounts. Jessica Hopper, the senior vice president and Acting Head of FINRA’s Department of Enforcement stated, that verifying the authority of a person purporting to act on behalf of a customer 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.” If you think you may have been subjected to any of the failure to supervise issues mentioned above, you should speak with a Failure to Supervise Trusts Law Firm in New York, like Malecki Law. The lawyers at Malecki Law are experienced in this space and are willing to hold a free consultation with you. The lack of procedure at a firm trickles down to the lack of compliance by the brokers resulting in custodians illegally controlling the beneficiaries’ accounts!


Contributions by Bethany Friedman, NYLS Securities Arbitration Seminar and Field Placement Extern

Contact Information