Oppenheimer & Co. Sanctioned By FINRA For Improper Sales Practices Relating To Unit Investment Trusts
On December 30, 2019, Oppenheimer & Co. became the latest brokerage firm sanctiuoned by FINRA for unlawful sales practices relating to Unit Investment Trusts (UITs”). Oppenheimer was fined $800,000 and ordered to pay restitution to customers in the amount of $3.87 million. The alleged misconduct related to short-term transactions in UITs, which are designed to be long-termn investment vehicles. These transactions resulted in high commissions to customers.
According to the FINRA Letter of Acceptance, Waiver and Consent (“AWC”), “During the Relevant Period, Oppenheimer executed more than $6.4 billion in UIT transactions that generated more than $68.6 million in sales charges. The $6.4 billion in UIT transactions included more than $753.9 million in proceeds from transactions in which UITs were sold more than 100 days before their maturity dates and some or all of the proceeds were used to purchase one or more new UITs (“early rollovers”). Approximately $237.1 million of the proceeds were for transactions in which customers sold UITs more than 100 days prior to their maturity dates and used some or all of the proceeds to purchase a subsequent series of the same UIT, which, as noted above, had, in many cases, the same or similar investment objectives and strategies as the prior series (“series-to-series early rollovers”).”
A copy of the FINRA AWC can be access by clicking https://www.finra.org/sites/default/files/fda_documents/2016050948101%20Oppenheimer%20%26%20Co.%20Inc.%20CRD%20249%20AWC%20jlg.pdf
A Unit Investment Trust is a closed-end investment company typically issues redeemable securities (or “units”), like a mutual fund, which means that the UIT will buy back an investor’s “units,” at the investor’s request, at their approximate net asset value (NAV). A UIT typically will make a one-time “public offering” of only a specific, fixed number of units (like closed-end funds). Many UIT sponsors, however, will maintain a secondary market, which allows owners of UIT units to sell them back to the sponsors and allows other investors to buy UIT units from the sponsors.
A UIT will have a termination date that is established when the UIT is created, although it may be in the distant future. In the case of a UIT investing in bonds, for example, the termination date may be determined by the maturity date of the bond investments. When a UIT terminates, any remaining investment portfolio securities are sold and the proceeds are paid to the investors.
A UIT does not actively trade its investment portfolio. That is, a UIT buys a relatively fixed portfolio of securities (for example, five, ten, or twenty specific stocks or bonds), and holds them with little or no change for the life of the UIT. Because the investment portfolio of a UIT generally is fixed, investors know more or less what they are investing in for the duration of their investment. Investors will find the portfolio securities held by the UIT listed in its prospectus.
Oppenheimer is one of several brokerage firms that was audited and ultimately sanctioned by FINRA regarding the sale of UITs. Specifically, FINRA was focused on short-term trading of UITs that have produced excessive commissions for Financial Advisors and minimal gain for the clients. UITs are known to produce commissions of 2%-3%, which is above-average for most securities products.
Financial advisors have a legal and regulatory obligation to recommend only suitable investments that are appropriate for their clients’ needs and objectives. Their employing brokerage firm has a legal and regulatory obligation to supervise the Financial Advisors’ sales practices and dealings with clients. To the extent any of these duties are breached, the customer may be entitled to a recovery of his or her investment losses.
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