Cetera broker-dealer hit with $1.1 million in fines and restitution over sales of unit investment trusts

Investors Capital is in the process of closing down and moving its advisers to another Cetera firm.

Investors Capital Corp., a broker-dealer in the Cetera Financial Group network, will pay $1.1 million in fines and restitution over the sale of unit investment trusts, according to a settlement with the Financial Industry Regulatory Authority Inc.
Through certain advisers, Investors Capital recommended unsuitable short-term trading of UITs and other complex financial products known as steepener notes in accounts of 74 clients, according to the settlement. In addition, Investors Capital also failed to apply sales charge discounts to certain customers’ purchases of UITs, according to Finra.
Finra fined Investors Capital $250,000 and the firm agreed to pay $842,000 in restitution. The firm has already paid close to $224,500 in restitution to clients.
Investors Capital is in the process of closing and moving 458 advisers to another Cetera firm, Cetera Advisors. Investors Capital last year produced $98.8 million in revenue.
“We’re pleased to put this matter behind Investors Capital, which comes at an appropriate time as we continue to make strong progress towards our previously announced goal of completing an orderly wind-down and discontinuation of this broker-dealer within the next several weeks,” said Joseph Kuo, a Cetera spokesman.
For the past year, Finra has been cracking down on brokerage firms for failing to give clients discounts for large purchases of investment products, including UITs.
A UIT is a type of fund that is a mix between an actively managed fund and a fixed portfolio of income-producing securities that is purchased and held to maturity. UITs typically issue 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, according to the Securities and Exchange Commission.
A UIT typically will make a one-time public offering of only a specific, fixed number of units, like closed-end funds.
So-called steepener notes are complex, structured products that allow investors to bet on the shape of the yield curve, according to Finra.
UITs are generally intended as long term investments, according to Finra.
From June 2010 to September 2015, two Investors Capital reps recommended “a number of unsuitable short-term UIT transactions in the accounts of several customers,” according to Finra. UITs usually carry significant upfront sales charges of 2.5% to 3.5% of the purchase amount, according to Finra. From January 2009 to September 2015, the firm failed to establish an adequate supervisory system to ensure that its reps made suitable UIT and steepener note recommendations to clients, according to Finra.
One 58-year-old Investors Capital client with a long-term growth objective for the account purchased and sold approximately 65 UITs, almost all of which had two-year maturity dates, in his account during a two and a half year period. The average holding period for the UITs was three months.