A UIT is a type of security that shares some similarities to mutual funds and closed-end funds (CEFs), insofar as a UIT consists of a basket of different investments. Historically, most UITs were structured as vehicles in which to purchase a basket of municipal bonds. Over time, UITs have evolved to the point where today, retail investors might invest in a variety of UITs offering exposure to various asset classes and economic sectors. However, unlike traditional mutual funds or CEFs, UITs are structured with a finite lifespan, and thus cease upon a given predetermined date. Additionally, UITs generally charge investors high fees, as high as 3-5% of the initial investment. Unfortunately, as a result of their fee structure, some brokers and investment advisers will encourage their clients to actively trade in and out of UITs, a practice commonly referred to as “switching” and akin to churning an investment portfolio, in an effort to generate excessive commissions for the benefit of the broker, and to the detriment of the uninformed investor. Switching transactions that appear to be fee-motivated may give rise to investor claims against advisors.

As alleged by the Division, since as early as 2012, “[C]unningham has engaged in short-term UIT trading in the accounts of his Massachusetts clients. Of [his] approximate 180 clients, nearly 60, or approximately 30%, are Massachusetts residents. Statements from [his] Massachusetts client accounts reflect sales of UITs as soon as 26 days after purchase and sometimes years before the UIT is predetermined to reach its maturity date. Cunningham often used proceeds of the sales to buy other UITs.”

Massachusetts regulators have further alleged that StockCross purportedly failed to effectively supervise Mr. Cunningham, citing “[f]ew substantive reviews of any of [his] trading activity” and, further, the lack of “[e]xception reports generated in connection with Cunningham’s short-term UIT trading activity.” Because UITs typically carry higher commissions and fees than many other retail financial products, there is a very real concern with some financial advisors switching, or rolling-over, from one UIT to another in order to earn enhanced commissions and fees.

Before recommending an investment product, applicable rules and regulations mandate that a financial advisor must first conduct a suitability analysis in order to determine whether the product best meets the investor’s stated objectives and profile. Moreover, under applicable industry rules and regulations, brokerage firms like StockCross are required to adequately supervise their registered representatives. In instances where brokerage firms fail to supervise their registered representatives, they may be held liable for losses sustained by investors.

Investors who wish to discuss a possible claim may contact a securities arbitration attorney at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or newcases@investorlawyers.net for a no-cost, confidential consultation.

On September 25, 2017, the Financial Industry Regulatory Authority (“FINRA”) issued a fine of $3.25 million against Morgan Stanley Smith Barney LLC (“Morgan Stanley”) in connection with the brokerage firm’s alleged failure to supervise its brokers’ short-term trades of unit investment trusts. Unit investment trusts (“UITs”) are a specific type of Investment Company, as defined by the Investment Company Act of 1940 (the ’40 Act), and subject to regulation by the SEC. Unlike mutual funds, closed-end funds, or ETFs, UITs are unique in that they are created for a specific, limited time period (e.g., 24 months). Furthermore, UITs consist of a static investment portfolio as part of a pre-selected pooled investment vehicle.

Typically, UITs impose a number of charges. Some of these charges include a deferred sales charge, a creation and development fee, as well as annual operating expenses charged as an annual fee to account for portfolio administration and bookkeeping. In aggregates, these various fees might total approximately 4% for a typical 24-month UIT. Thus, any investor in a UIT will experience a “drag” on the performance of their UIT portfolio in the form of various fees.

Because UITs carry a substantial fee structure and are subject to termination after a given time period, there exists the potential for some financial advisors to recommend to their clients that they roll-over, or switch, from one UIT to another. In its worst form, this sales practice amounts to a stock broker seeking enhanced income through switching clients out of one product to another on a short-term basis in order to earn commissions and fees, at the expense of the client.

After undertaking an investigation, FINRA alleged that hundreds of Morgan Stanley representatives “… executed short-term UIT rollovers, including UITs rolled over more than 100 days before maturity, in thousands of customer accounts” during a period from January 2012 through June 2015. In addition, FINRA alleged that Morgan Stanley did not provide sufficient guidance to Morgan Stanley supervisory personnel on, for example, how to review UIT transactions to discover unsuitable short-term trading. FINRA ordered the brokerage firm to pay approximately $3.5 million in fines, in addition to restitution of nearly $10 million to the approximately 3,000 customers who allegedly were negatively impacted.

As stated by FINRA Executive VP Susan Schroeder: “Due to the long-term nature of UITs, their structure, and upfront costs, short-term trading of UITs may be improper and raises suitability concerns. Firms must adequately supervise representatives’ sales of UITs – including providing sufficient training – and have in place a system to detect potentially unsuitable short-term UIT rollovers.”

Because UITs typically carry higher commissions and fees than many other retail financial products, there is a very real concern with some financial advisors switching, or rolling-over, from one UIT to another in order to earn enhanced commissions and fees. Before recommending an investment product, applicable rules and regulations mandate that a financial advisor must first conduct a suitability analysis in order to determine whether the product best meets the investor’s stated objectives and profile. Moreover, under applicable industry rules and regulations, brokerage firms like Morgan Stanley are charged with supervising their registered representatives.

The attorneys at Law Office of Christopher J. Gray, P.C. have significant experience in recovering funds on behalf of investors who have suffered losses due to unsuitable recommendations by stockbrokers and financial advisors. Investors may contact our office at (866) 966-9598 or newcases@investorlawyers.net for a no-cost, confidential consultation.

FINRA alleged that certain Investors Capital brokers recommended that customers engage in unsuitable short-term transactions in UITs, and also alleged that the firm failed to apply sales charge discounts that should have been available to some customers. FINRA further alleged that Investors Capital Corporation lacked adequate systems and procedures to supervise the sales of UITs, leading to the violations. Short-term trading in UITs may be uneconomical in many cases due to relatively high up-front sales charges, and UITs are typically recommended only as long-term investments.

Investors Capital’s alleged violations occurred between 2010 and 2015.

When a broker recommends that a client purchase or sell a security, the broker must have a reasonable basis for believing that the recommendation is suitable for the investor. In making this assessment, a broker must consider the investors income and net worth, investment objectives, risk tolerance, and other security holdings.

If you received an unsuitable recommendation of securities from a broker or investment adviser, and suffered significant losses are a result, you may be able to recover your losses in FINRA arbitration. To find out more about your legal rights and options, contact a securities arbitration lawyer at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or newcases@investorlawyers.net for a no-cost, confidential consultation.