FINRA: Merrill Lynch to pay $11.25 million in case of UIT rollovers

Rick Steves

FINRA has fined Stifel and Oppenheimer’s operations for similar charges in the past two years.

FINRA boosts OTC transparency by 20% of all NMS Equities

FINRA has ordered Merrill Lynch, Pierce, Fenner & Smith, Inc. to pay more than $8.4 million in restitution to more than 3,000 customers who incurred potentially excessive sales charges in connection with early rollovers of Unit Investment Trusts (UITs).

The Financial Industry Regulatory Authority also fined the firm $3.25 million for failing to reasonably supervise early UIT rollovers.

A UIT is an investment company that offers investors shares, or “units,” in a fixed portfolio of securities in a one-time public offering that terminates on a specific maturity date, often after 15 or 24 months.

UITs are generally intended as long-term investments and have sales charges based on their long-term nature, including an initial and deferred sales charge and a creation and development fee.

A registered representative who recommends that a customer sell his or her UIT position before the maturity date and then “rolls over” those funds into a new UIT causes the customer to incur increased sales charges over time, raising suitability concerns.

Merrill Lynch executed more than $32 billion in UIT transactions between January 2011 and December 2015, including approximately $2.5 billion in which the UITs were sold more than 100 days before their maturity dates and some or all of the proceeds were used to purchase one or more UITs (early rollovers).

FINRA found the firm’s supervisory system was not reasonably designed to identify those early rollovers. While the firm’s automated reports identified when a representative recommended an early rollover of a UIT that had been held for seven months or less, the firm did not have any report that identified when a representative recommended an early UIT rollover that had been held for longer than seven months.

As a result, Merrill Lynch did not identify that its representatives recommended thousands of potentially unsuitable early rollovers that, collectively, may have caused more than 3,000 customer accounts to incur more than $8.4 million in sales charges that they would not have incurred had they held the UITs until their maturity dates.

Jessica Hopper, Executive Vice President and Head of FINRA’s Department of Enforcement, commented: “Customers often incur unnecessary costs when representatives recommend short-term sales of products that are intended as long-term investments. FINRA member firms must implement supervisory systems sufficient to identify these potentially unsuitable transactions. Providing restitution to harmed investors remains a top priority for FINRA.”

Last year, FINRA fined Stifel, Nicolaus & Co $1.75 million, as well as $1.9 million in restitution to over 1,700 customers, in connection with early rollovers of Unit Investment Trusts.

In 2019, Oppenheimer & Co. Inc. was found to have failed to reasonably supervise early unit investment trust (UIT) rollovers. FINRA ordered Oppenheimer & Co. Inc. to pay more than $3.8 million in restitution to customers and fined the firm $800,000.

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