Outside-IN

Finra's Focus on UITs

Overlooking price discounts and pushing early rollovers can land firms in hot water

Oct 10, 2017 @ 12:52 pm

By Perrie Michael Weiner and Kirby Hsu

In recent years, the Financial Industry Regulatory Authority, Inc. has been scrutinizing its member broker-dealers' sales, recommendations and procedures relating to investments in unit investment trusts (UITs). Its 2017 Regulatory and Examination Priorities Letter reaffirmed its committment to doing so. Because of the ongoing focus on UIT transactions, Finra-registered firms and brokers must be aware of the potential liability that could arise from inadequate supervision and the failure to give clients the appropriate UIT-related discount.

But first, a quick refresher on these instruments. UITs are registered investment companies that offer redeemable units of a portfolio of securities with specified termination dates. Typically, a UIT is organized by investment banks or broker-dealers who sponsor and create its portfolio. The portfolios are generally fixed: UITs employ a buy-and-hold strategy and are not actively managed. Units of UITs, which represent undivided interests in the portfolio, are first issued at an initial public offering. Though they are designed to be bought and retained until termination, investors can redeem the units at any time for a proportionate share of the UIT's net asset value (NAV). Often, the sponsor will maintain a secondary market to facilitate the buying and selling of units without causing depletion of the UIT's NAV.

The key distinctive feature of UITs is their predetermined termination dates. UIT sponsors typically offer a series of UITs, in which the offering period of a new UIT begins with the termination of a prior one. At the end of a UIT's fixed term, investors typically are given the option of rolling their money into a new UIT.

UIT sponsors generally offer price break discounts, which are sales charge discounts that increase depending on the dollar amount of a purchase. Similarly, sponsors often offer discounts to incentivize investors to roll money from a terminating UIT into a new one.

FINRA INVESTIGATIONS

In the past, Finra has focused on the proper application of these discounts. In its March 2004 Regulatory Notice, for example, the authority reminded member broker-dealers of their duty to maintain procedures to ensure that investors receive the correct discounts.

Failure to do so could be a violation of Finra Rule 2010, relating to members' obligations to "observe high standards of commercial honor and just and equitable principles of trade," or Rule 3110, relating to proper supervision and establishing written procedures. In October 2015, Finra ordered twelve firms to pay restitution totaling over $4 million and fines totaling over $2.6 million for failing to apply appropriate sales charge discounts, failing to properly supervise investment advisors, and failing to establish adequate written procedures. The individual liabilities ranged from roughly $135,000 to over $1 million.

Finra has also focused on members' recommending early rollovers to increase their sales credits. Early rollovers of UIT investments, which are designed for longer terms, may increase investor costs and cause losses. Finra has suspended investment advisers who recommend early rollovers that hurt investors from association with member broker-dealers. In October 2016, one firm entered into a settlement to pay over $1 million in restitution and fines without admitting or denying the allegations that it, among other things, recommended unsuitable short-term UIT rollovers.

In September 2016, Finra conducted an inquiry into UIT rollover practices from January 1, 2014, through June 30, 3016, at select firms. The targeted exam letter sent by Finra requested firms' written supervisory procedures with respect to UITs, a list and description of exception reports, a list of the top twenty-five registered representatives who generated the highest early rollover revenue and had the highest number of early rollovers, and other information relating to transaction blotters and customer lists. Finra defined "early rollover" as one that occurs 100 or more days before the UIT's termination.

As stated in this year's Regulatory and Examination Priorities Letter, Finra will continue to focus on members' application of price break discounts, rollover recommendations, and supervision of UIT transactions. In light of this declared aim, it is important for Finra-registered brokers and firms that sell UITs to review their written procedures to ensure that customers receive applicable discounts for new purchases, as well as for rollovers. Firms may also consider looking into whether their representatives recommend early rollovers and confirm that such recommendation is made only to the appropriate clients.

Perrie Michael Weiner and Kirby Hsu are attorneys at law firm DLA Piper.

0
Comments

What do you think?

View comments

Upcoming event

Jul 09

Conference

Boston Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in six cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Most watched

INTV

Schwab's Jeff Kleintop: Prep for volatility given China trade uncertainties

China could be considered a developed market in five to seven years , according to Jeff Kleintop, chief global investment strategist, Charles Schwab.

INTV

Young advisers envision a radically different business in five years

Fintech and sustainable investing are two factors being watched closely by some of the 2019 class of InvestmentNews' 40 Under 40.

Latest news & opinion

Funding for Reg BI, other SEC advice reform efforts denied in Waters amendment

House likely to approve measure that effectively kills rule package, but it faces uphill battle in Senate

Wall Street lashes out at Sanders' plan to pay off student debt with a securities trading tax

Financial pros argue that a transaction levy will hurt mom-and-pop investors along with investment houses.

GPB paid B-Ds and reps steep commissions to sell troubled private placements

GPB paid commissions of 9.3%, or $167 million altogether, on the firm's private placements.

Give us a break, active managers say

Seven portfolio managers share their outlooks for the rest of the year, generally agreeing that it's been hard for active managers to stand out.

GPB Capital reports decline in value of two biggest funds

One has dropped by 25.4% and the other by 39%, according to the company.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print