Avantax Investment Services, Inc has been penalized by the Financial Industry Regulatory Authority for supervisory failures regarding custodial accounts, Financial Advisor reports.
According to FINRA, thousands of custodial accounts for minors remained uncontrolled for years due to the deficiencies.
In its settlement letter, the authority stated that from January 2019 to August 2023, Avantax failed to establish and maintain a supervisory system, and failed to establish, maintain, and enforce written supervisory procedures (WSPs), reasonably designed to achieve compliance with FINRA Rule 2090, which requires member firms to use “reasonable diligence” to determine “the essential facts concerning every customer and concerning the authority of each person acting on behalf of such customer.”
Avantax, an affiliate of Cetera Financial Group, was censured and agreed to pay a fine of $200,000 as a part of the settlement.
The failures involved accounts governed by the Uniform Gifts to Minors Act and the Uniform Transfers to Minors Act. These accounts allow adults to transfer assets, including cash, stocks and bonds, to a minor without the need for a formal trust. An adult custodian manages the account until the beneficiary reaches the age of majority, typically between 18 and 25 depending on state law. At that point, the assets legally belong to the beneficiary, and control must be transferred.
Avantax allegedly failed to reasonably supervise changes in custodial authority when beneficiaries reached the applicable termination age. FINRA stated that the firm lacked systems and procedures to track or monitor when custodians’ authority ended and did not verify whether custodians retained authority to act on accounts after that point. Between January 2019 and August 2023, beneficiaries of 12,642 UTMA accounts at the firm reached the relevant age, FINRA said. As of May 1, 2023, 8,382 of those accounts remained open and had not been re-titled or transferred to the beneficiary.
Based on this conduct, Avantax was found to have violated FINRA Rules 3110(a) and 3110(b), which require member firms to establish and maintain supervisory systems and written supervisory procedures. The firm also violated Rule 2090 and Rule 2010, which requires firms to observe high standards of commercial honor and just and equitable principles of trade
In a response, Cetera spokesman Tony Katsulos said in an email, “Cetera has resolved a historical FINRA supervisory matter involving UTMA/UGMA accounts at Avantax from 2019 to 2023, without admitting or denying the allegations, and with no impact to clients or daytoday operations. Cetera is pleased to have resolved these matters with FINRA and will continue to focus on providing exceptional service for Cetera financial professionals and their clients.”
Avantax did not admit or deny the allegations but consented to the findings.
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