Finra orders Stifel to pay $3.6 million for violations in sales of unit investment trusts

About $1.9 million goes to harmed customers, an emphasis for the new Finra enforcement director

Finra imposed more than $3.6 million in sanctions on Stifel Nicolaus & Co. Inc. Thursday for violations involving the sales of unit investment trusts.

The Financial Industry Regulatory Authority Inc. ordered Stifel to pay about $1.9 million in restitution to about 1,700 customers for failing to supervise recommendations to roll over their UITs before they matured. The transactions were potentially unsuitable, Finra said, and caused the customers to incur sales charges they wouldn’t have had to pay had they held onto the investments for the full term.

From January 2012 through December 2016, Stifel executed about $10.9 billion in UIT transactions, of which about $935.2 million were rollovers occurring more than 100 days from their maturity date. Stifel also sent about 600 letters to customers misleading them about the costs of UIT rollovers, or “switches.” Those communications understated the cost of the switch by about 49%, Finra said.

A unit investment trust is an investment company that offers investors a share in a portfolio of securities in a one-time offering that matures in about 15 to 24 months. Rolling customers over to a new UIT before their current UIT matures generates additional sales costs.

Finra brought the case following a 2016 targeted examination of UITs. Finra also made UITs an examination priority in 2018.

“Firms must have an adequate supervisory system in place to detect potentially unsuitable UIT rollovers, and also provide customers with accurate information so they can make informed decisions about those rollover recommendations,” Finra executive vice president and head of enforcement Jessica Hopper said in a statement. “We are pleased that customers will receive restitution for sales charges incurred as a result of the recommendations.”

A Stifel spokesperson declined to comment. The firm neither admitted nor denied the charges.

Hopper took over the Finra enforcement arm last year. The emphasis on restitution is something that could become a Finra hallmark under her leadership, said Alan Wolper, a partner at Ulmer & Berne.

“We should expect to receive requests for restitution when customer out-of-pocket [harm] is quantifiable,” Wolper said. “This is clearly the direction Jessica Hopper is taking the enforcement department.”

That approach also opens the door for a targeted firm to negotiate down other financial penalties, if they take the initiative to return money to customers, he said. For instance, in a recent enforcement case, SunTrust voluntarily paid back customers and Finra imposed a fine of only $50,000, Wolper pointed out.

“If you do it voluntarily, perhaps you get some credit for that in terms of the overall sanctions that Finra metes out,” he said.

The timing of Finra’s settlement with Stifel had Wolper scratching his head.

The violative behavior covered in the case last occurred in 2016, the year Finra conducted its sweep exams. The broker-dealer self-regulator then took nearly four years to impose sanctions.

Such a delay in enforcement puts the targeted firm at a disadvantage in defending itself, Wolper said.

“Some of these cases are surprisingly old,” he said. “It frustrates the whole dynamic of the exam process. I wish Finra would act with more alacrity.”