FINRA reaches settlement with investment firms over UIT rollover concerns

The Financial Industry Regulatory Authority (FINRA) reached settlements with six member investment firms to pay restitution to customers over unit investment trust (UIT) early rollovers.

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All of the firms failed to reasonably supervise early rollovers of UITs, which caused customers to incur potentially excessive sales charges. Through the settlements, FINRA obtained more than $16.8 million in restitution to approximately 10,000 investors.

A UIT is a form of investment company that offers investors shares, or “units,” in a fixed portfolio of securities in a one-time public offering. The one-time public offering terminates on a specified maturity date, often after 15 or 24 months. UITs are generally intended as long-term investments. They have sales charges based on their long-term nature, including deferred sales charges, as well as a creation and development fee.

A registered representative who recommends that a customer sell his or her UIT position before the maturity date and then “roll over” those funds into a new UIT causes the customer to incur greater sales charges than if the customer had held the UIT until maturity.

FINRA and other regulators conduct targeted exams, or sweeps, to gather information about issues of concern for the industry and investors. FINRA initiated the sweep of early UIT rollovers after finding a member firm failed to reasonably supervise early UIT rollovers in thousands of customers’ accounts. That firm agreed to a settlement requiring it to pay $9.8 million in restitution along with a $3.25 million fine. FINRA also identified similar supervisory failures at six additional firms, all of which agreed to settlements requiring the firms to pay a total of $16.8 million in restitution and $6.6 million in fines.

“This multi-year effort reflects FINRA’s commitment to proactively identifying problems and providing restitution to harmed investors. These cases should serve as a clear reminder to member firms to ensure their supervisory systems are reasonably designed to supervise sales of all the products they offer. Firms should be particularly vigilant in identifying representatives who recommend trading strategies intended to generate commissions for the representative without regard for the intended use of the product,” Jessica Hopper, executive vice president and head of FINRA’s Department of Enforcement, said.