Over the past several years, structured products have come in a new outfit - a unit investment trust ("UIT") wrapper. These UITs, as opposed to typical UITs with a basket of common stocks as the trust assets, have structured note payoffs, with features such as buffers, leverage and caps. Structured UITs have the same fee structure as typical UITs - an initial sales charge, a deferred sales charge and a creation and development fee.
Recently, a broker-dealer was fined $8.4 million by the Financial Industry Regulatory Authority, Inc. ("FINRA") for failure to supervise early rollovers of non-structured UITs.1 This occurs when an investor in an existing UIT sells out of his position prior to maturity, and buys into another UIT, often with the same or similar assets in the trust. The effect of this rollover on the investor is that the investor will pay increased sales charges over time. The broker-dealer had a system in place to flag rollovers for UITs that had been held seven months or less, but it did not flag rollovers after seven months. Most UITs have a maturity of 15-24 months, and are treated as long-term investments, to be held to maturity.
Broker-dealers should ensure that any UIT rollover features are not being abused, whether with respect to nonstructured UITs, as in this case, or structured UITs.
Originally published in REVERSEinquiries: Volume 4, Issue
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1. The FINRA News Release and Letter of Acceptance, Waiver and Consent can be found at: FINRA Order for $8.4 Million in Restitution to Customers for Supervisory Failures Involving UITs
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