FINRA Reaches Settlement With Investment Firms Over ITU Rollover Issues

The Financial Industry Regulatory Authority (FINRA) has entered into agreements with six member investment firms to pay restitution to clients on advance rollovers of unit investment trusts (UITs).

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Not all companies reasonably supervised early ITU renewals, resulting in potentially excessive sales charges for customers. Through the settlements, FINRA obtained more than $16.8 million in restitution from approximately 10,000 investors.

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

A Registered Representative who recommends that a client sell their UIT position before the maturity date and then “flight” those funds into a new UIT incurs a higher selling fee for the client than if they had held the ITU until maturity.

FINRA and other regulators conduct targeted reviews, or scans, to gather information on issues of concern to industry and investors. FINRA launched the first UIT rollover scan after it discovered that a member firm failed to reasonably oversee first UIT rollovers in thousands of client accounts. The company agreed to a settlement requiring it to pay $9.8 million in damages and a fine of $3.25 million. FINRA also identified similar oversight failures at six other companies, all of which agreed to settlements requiring the companies 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 identify issues and compensate harmed investors. These cases should serve as a clear reminder to member companies to ensure that their surveillance systems are reasonably designed to monitor the sales of all the products they offer. Firms should be especially vigilant in identifying representatives who recommend trading strategies intended to generate commissions for the representative regardless of the intended use of the product,” said Jessica Hopper, executive vice president and head of the FINRA app.