In this uncontested proceeding, the petitioner, as guardian of the property of her daughter, AH James Hart (AH), seeks authorization to establish a non-managed brokerage account at HSBC Securities and to invest the guardianship funds in a treasury note and a 4-year structured certificate of deposit (structured CD). AH’s funds total approximately $878,340.78, and derive from the settlement of a wrongful death action arising out of the death of her father. AH is six years old. For the reasons set forth below, the petition is denied without prejudice to renew. Pursuant to SCPA 1708, the guardian of an infant’s property is required to post a bond to secure the property (SCPA 1708 [1]). There are only three circumstances in which the court may dispense with a bond: (1) when it directs the guardian to hold the infant’s funds jointly with the Court or with a designated depository (see SCPA 1708 [2] [a]); (2) where it authorizes the guardian to purchase or invest in U.S. savings bonds, treasury bills, treasury notes, treasury bonds, or bonds of the state of New York or other obligations of any New York county, city, town village or school district (see SCPA 1708 [2] [b]); or (3) where it authorizes the guardian to invest the infant’s funds pursuant to an investment advisory agreement with a bank, brokerage or financial services entity acceptable to the court (see SCPA 1708 [2] [c]). With respect to SCPA 1708 (2) (c), the investment advisory agreement must include certain provisions, including that the funds shall be invested in accordance with EPTL 11-2.3 (the Prudent Investor Act) and that no withdrawals be made without court order (see SCPA 1708 [2] [c]). In amending SCPA 1708 to permit guardians to invest guardianship funds without posting a bond, the Legislature included the requirement that the investment advisor invest the funds in accordance with the Prudent Investor Act in order to ensure the safety of the guardianship funds because the investment advisor/brokerage is then liable if it violates the Act (see Turano, Practice Commentaries, McKinney’s Cons Law of NY, Book 58A, SCPA 1708). In addition, as set forth in case law, the investment advisory agreement cannot provide any means of divesting the court of its continuing jurisdiction, and the fees must be reasonable and not increased without court approval (see e.g. Matter of Rothstein, NYLJ, April 17, 2013, at 22, col 4; Matter of Tahir Dawkins, NYLJ, 2006 NY Misc Lexis 8918 [2006]). The petitioner has attached to her application a copy of the following: a customer agreement with HSBC Securities, a “Customer Receipt and Acknowledgement Form for Structured Certificates of Deposit”, a new account form, and a letter dated May 8, 2019, in which she states that she seeks to establish a normal retail brokerage account with HSBC Securities, in which she proposes to hold only two positions: a Treasury Note Security and a four-year structured CD. According to the “Customer Receipt and Acknowledgement Form for Structured Certificates of Deposit”, the petitioner plans to make a purchase from HSBC Bank (an affiliate of HSBC Securities) of $500,000.00 in a 4-year Global Opportunity CD, which is FDIC-insured up to $250,000.00. HSBC Securities would receive a fee up to six percent of the aggregate principal amount of the structured CD. The petitioner states that she would not make any other purchases without court approval and that there will be no advisory fees, as the account will not be actively managed. She also states that she maintains sufficient liquidity to meet her daughter’s needs. In addition, the petitioner has submitted a letter to her from Joseph Longobardi, Vice President, Premier Wealth Advisor of HSBC Securities, who writes that HSBC Securities will permit her to establish a Guardianship investment account based on her investment objectives, that the account would be established with a conservative risk tolerance with the objective of preserving asset value (preference for holding cash or cash equivalents in order to help preserve existing level of assets), that there will be no annual advisory fees and acknowledging that HSBC will need the court’s approval for distributions. The court recognizes and wholeheartedly supports the petitioner’s desire to invest AH’s funds in a way that will yield a higher return than she would receive at a bank. Unfortunately, however, this application must be denied because the proposed investments do not meet the minimum statutory requirements. The Treasury Note While the statute permits the court to authorize the petitioner to purchase and invest in a treasury bond, the statute identifies the entities with which a guardian can deposit the notes. These are: a bank, savings bank, trust company: safe deposit company; or state or federal credit union, (see SCPA 1708 [2] [b]). HSBC Securities is a brokerage house, and a brokerage house is not included in the statutory list of acceptable depositories. Accordingly, it cannot hold the notes. If the petitioner chooses to invest in a treasury note, she may do so by submitting an affidavit identifying one of the specified types of depositories and stating that the note shall be held in joint custody with the entity subject to the order of the court.1 The Structured CD A structured CD with a brokerage house is not the same as a bank certificate of deposit, into which guardianship funds are often deposited. Unlike a bank certificate of deposit, which typically carries no fee and provides for interest payments periodically at a fixed rate, the structured CD generally carries a fee and pays interest periodically or at maturity based on the performance of an underlying asset, such as one or more securities (see e.g. Morrison & Forster, “Frequently Asked Question About Structured Certificates of Deposit”, available at https://media2.mofo.com/documents/frequentlyasked-questions-about-structured-certificates-of-deposit.pdf; FINRA.org, Certificates of Deposits and Brokered CD- -Not Always FDIC Insured at http://www.finra.org/investors/certificates-deposit-cds; see also M. Sorrentino, “5 reasons why retirees should avoid structured CDs,” published by Marketwatch, November 15, 2016 available at https://www.marketwatch.com/story/5-reasons-whyretirees-should-avoid-structured-cds-2016-11-15). Structured CDs are not one of the investments which the court can authorize under SCPA 1708, unless the petitioner posts a bond (see SCPA 1708 [1], [2] [a], [b], and [c]). Moreover, structured CDs are only insured by the FDIC up to $250,000.00, which in the product the petitioner proposes to buy, would leave $250,000.00 of the guardianship funds without FDIC protection. In addition, it is unclear from the materials submitted whether the fee, “up to 6 percent of the aggregate principal amount of the Structured CD sold,” is reasonable. According to the “Customer Receipt and Acknowledgement Form for Structured Certificates of Deposit” the structured CD may also have certain tax consequences including the generation of tax obligations in years in which no actual income has been received. The petitioner may, however, invest the guardianship funds pursuant to an investment advisory agreement that is acceptable to the court. None of the materials she submitted constitutes an investment advisory agreement. Indeed, Paragraph 34 of the customer agreement states that “unless HSBC Securities has expressly agreed otherwise, HSBC Securities is acting in the capacity of [the customer's] broker in connection with any transaction executed for [the customer's] account and not as an investment advisor.” This court notes that there is nothing in the materials submitted that obligates HSBC Securities or anyone else to comply with the Prudent Investor Act, which requires, as part of the prudent investor standard, among other things, the consideration of the size of the portfolio, the nature and estimated duration of the fiduciary relationship, the liquidity and distribution requirements, general economic conditions, the expected tax consequences of investment decisions, the expected total return of the portfolio and the needs of the beneficiaries or present and future distribution (see EPTL 11-2.3 [b] [3] [B]).2 Without an agreement in which the investment advisor agrees to invest guardianship funds in accordance with the Prudent Investor Act, the protection of the funds, upon which the Legislature relied in enacting the statute, is not present. The court expresses no opinion on the proposed investment positions that petitioner has chosen here; rather, for investments not covered by SCPA 1708 (2) (b), the statutory scheme places the obligation to comply with the Prudent Investor Act with the investment advisor. The petition is denied without prejudice to renew. If the petitioner wishes to invest the guardianship funds, then she should submit an investment advisory agreement that contains (or includes a supplement to the agreement that contains) the following:3 A provision that the guardianship funds shall be invested in accordance with the Prudent Investor Act (EPTL 11-2.3) (see SCPA 1708 2 [c]). A provision that the funds so invested shall not be released from the custody of the custodian identified in the agreement except on court order; (see SCPA 1708 2 [c]); In addition: The agreement or supplement must subject the parties to the continuing jurisdiction of the court (i.e., must not contain an arbitration clause) (see Matter of Rothstein, NYLJ, April 17, 2013, at 22, col 4) and the court must be assured that the fees are reasonable and will not be unilaterally increased without court approval (see id). Dated: July 31, 2019 White Plains, N.Y.
