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FINRA Sanctions Morgan Stanley for Failing to Supervise UIT Sales

Money MazeOn 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 for a no-cost, confidential consultation.

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