Unit Investment Trusts, or UITs, are legal structures that invest in a fixed portfolio of securities (usually stocks or bonds) and are designed to provide capital appreciation and income. UITs are closed-ended, meaning they do not trade on an exchange, which creates illiquidity and can contribute to price volatility. UITs typically have pre-determined maturities that may or may not coincide with the customer’s investment objectives. The commission structure of UITs can be as high as 3.5%-4.5%, upfront, plus a trail. The UITs are only suitable for investors willing and able to accept significant portfolio volatility.
FINRA Has Rules Regarding The Sale Of UITs And Other Alternative Investments
Notice to Member 03-71, FINRA stated “in the aftermath of the recent downturn in the equity markets, NASD reviewed the services and products offered by members and observed that retail investors were being offered an array of different investments as alternatives to conventional equity and fixed-income investments. These alternative investments do not fall under a common category; the staff review indicates that brokers and retail investors have shown increased interest in products such as asset-backed securities, distressed debt, and derivative products (for ease of reference these products are collectively referred to as non-conventional investments or “NCIs”). NCIs often have complex terms and features that are not easily understood.”
Notice to Member 03-71 further provides that “Members must establish sufficient internal controls, including supervision and training requirements, that are reasonably designed to ensure that sales of NCIs comply with all applicable NASD and SEC rules. Members must ensure that their written procedures for supervisory and compliance personnel require that (1) the appropriate due diligence/reasonable-basis suitability is completed before products are offered for sale; (2) associated persons perform appropriate customer-specific suitability analysis; (3) all promotional materials are accurate and balanced; and (4) all NASD and SEC rules are followed. In addition to establishing written procedures, members also must document the steps they have taken to ensure adherence to these procedures.
FINRA Regulatory Notice 12-03 requires member firms to implement “heightened supervision of complex products.” Specifically, 12-03 provides that product “complexity adds a further dimension to the investment decision process beyond the fundamentals of market forces. This may be the case even though the complexity of some products may arise from features that seek to reduce the probability of investment losses in particular situations. Regulators have expressed concern about complex products because the intricacy of these products can impair the ability of registered representatives or their customers to understand how the product will perform in a variety of time periods and market environments and can lead to inappropriate recommendations and sales.”
“Reasonable diligence must provide the firm or registered representative ‘with an understanding of the potential risks and rewards associated with the recommended security or strategy.’ This understanding should be informed by an analysis of likely product performance in a wide range of normal and extreme market actions. The lack of such an understanding when making the recommendation could violate the suitability rule. Firms should have formal written procedures to ensure that their registered representatives do not recommend a complex product to a retail investor before it has been thoroughly vetted. Those procedures should ensure that the right questions are answered before a complex product is recommended to retail investors.”
FINRA has identified UIT trading abuses as one of its examination priorities and specifically warned that “given that registered representatives earn most of the fees associated with UITs at or shortly following the initial offering period, there is a risk that they may recommend early rollovers or exchanges to increase their sales credits. FINRA identified instances in which customers were advised to roll their UIT investments over early, and firms did not have appropriate supervisory mechanisms in place to identify and review the suitability of the recommendation. This practice causes investors to incur additional sales charges, including both creation and development fees and deferred sales charges.” (See https://www.finra.org/rules-guidance/guidance/reports/2017-report-exam-findings/product-suitability). In FINRA Notice to Members 04-26, FINRA warned brokerage firms that in appropriate cases, they had an obligation to offer breakpoints with respect to UITs.
FINRA Sanctioned Multiple Brokerage Firms
Among the brokerage firms sanctioned include Wells Fargo Advisors, Raymond James, Stifel Nicolaus & Co., Merrill Lynch, Oppenheimer & Co. and Cambridge Investment Research. For a description of these sanctions, see below:
- Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC have been censured, fined $550,000 and $100,000 respectively, and ordered to pay a combined restitution of approximately $2.5M to affected customers over allegations over suitability and proper supervision of short-term trades. The FINRA allegation states, “From July 2013 through June 2018, Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC (together, Wells Fargo) failed to establish and maintain a supervisory system that was reasonably designed to achieve compliance with 1 For more information about the firms, including prior regulatory events, visit BrokerCheck® at www.fmra.org/brokercheck. FINRA’ s suitability rule as it pertains to early rollovers of Unit Investment Trusts. Wells Fargo therefore violated NASD Rule 3010, FINRA Rule 3110, and FINRA Rule 2010.”
- Merrill Lynch was fined $3.2M, censured, and ordered to pay restitution of more than $8M to affected customers, plus interest. The FINRA allegations state, “From January 2011 through December 2015, Merrill Lynch failed to establish and maintain a supervisory system that was reasonably designed to achieve compliance with FINRA’s suitability rule as it pertains to early rollovers of UTIs. Merrill Lynch therefore violated NASD Rule 3010 (for conduct before December 1, 2014), FINRA Rule 3110 (for conduct on or after December 1, 2014), and FINRA Rule 2010.”
- Stifel, Nicolaus & Co. was censured, fined $1.75M, and ordered to pay restitution of $1.89M to affected customers. The FINRA allegations state, “From January 2012 through December 2016 (the “Relevant Period”), Stifel failed to establish and maintain a supervisory system, and failed to establish, maintain, and enforce written supervisory procedures (“WSPs”), that were reasonably designed to achieve compliance with FINRA’s suitability rule as it pertains to early rollovers of Unit Investment Trusts. Based on the foregoing, Stifel violated NASD Rule 3010 (for conduct before December 1, 2014) and FINRA Rule 3110 (for conduct on or after December 1, 2 2014) and FINRA Rule 2010. In addition, during the Relevant Period, Stifel sent approximately 600 switch letters to customers that contained inaccurate or missing information about the costs that they incurred as a result of early rollovers of Unit Investment Trusts, in violation of FINRA Rule 2010.”
- Oppenheimer & Co. was censured, fined $800,000, and ordered to pay restitution of more than $3.8M plus interest to affected customers. The FINRA allegation states, “From January 2011 through December 2015 (the “Relevant Period”), Oppenheimer failed to establish and maintain a supervisory system, and failed to establish, maintain, and enforce written supervisory procedures (“WSPs”), that were reasonably designed to supervise the suitability of representatives’ recommendations as they pertain to early rollovers of Unit Investment Trusts. Based on the foregoing, Oppenheimer violated NASD Rule 3010 (for conduct before December 1, 2014), and FINRA Rule 3110 (for conduct on or after December 1, 2014), and FINRA Rule 2010.”
- Cambridge Investment Research was censured and fined $150,000. The FINRA allegation states, “At various times between July 2013 and January 2017, Cambridge failed to establish and maintain a supervisory system that was reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable NASD and FINRA Rules, in three principal areas of the Firm’s business:
- Between July 1, 2013 and December 31, 2014, the Firm failed to reasonably supervise short-term trading of UITs and mutual fund Class A Shares;
- Between February 1, 2014 and September 21, 2014, the Firm failed to reasonably supervise compliance with NASD Rule 2440 (for conduct before May 9, 2014) and FINRA Rule 2121 (Fair Prices and Commissions), which resulted in the Firm charging excess commissions on approximately 30 transactions; and,
- Between February 1, 2016 and January 31, 2017, the Firm failed to reasonably ensure that customers received available mutual fund breakpoint discounts. Through this conduct, the Firm violated NASD Rule 3010 (for conduct before December 1, 2014), and FINRA Rules 3110 and 2010.”
If your Financial Advisor recommended that you invest in unit investment trusts, and you have experienced losses or no gains due to excessive trading, you may be able to recover your investment losses through a FINRA arbitration claim. Contact the Wolper Law Firm at 800.931.8452 for a free consultation to discuss your legal rights.