The Financial Industry Regulatory Authority (“FINRA”) has fined and sanctioned Oppenheimer & Co., Inc. for failing to supervise short-term trading in Unit Investment Trusts (“UITs”).
A Unit Investment Trust (“UIT”) is an SEC-registered investment company that offers investors shares or “units” in a fixed portfolio of securities in a one-time public offering. A UIT terminates on a specified maturity date, often after 15 or 24 months, at which point the underlying securities are sold and the resulting proceeds are paid to the investors. Generally, a UIT’s portfolio is not actively managed between the trust’s inception and its maturity date.
UITs impose a variety of upfront sales charges. For example, during the Relevant Period, a typical 24-month UIT contained three separate charges: (1) an initial sales charge, which was generally 1% of the purchase price; (2) a deferred sales charge, which was generally up to 2.5% of the offering price; and (3) a creation and development fee (“C&D fee”), which was generally 0.5% of the offering price.’ If the proceeds from the sale of a UIT were “rolled over” to fund the purchase of a new UIT, UIT sponsors often waived the initial sales charge, but still applied the deferred sales charge and C&D fee.
A registered representative who recommended the sale of a customer’s UIT before its maturity date and used the sale proceeds to purchase a new UIT would cause the customer to incur greater sales charges than if the customer had held the UIT until maturity. For example, a hypothetical customer who purchased a 24-month UIT and held it until maturity would have paid a sales charge of about 3.95%. However, if after six months, the customer rolled over the UIT into a new UIT, he or she would have paid an additional 2.95% in sales charges. And, if the customer repeatedly rolled over the existing UIT into a new UIT every six months, he or she would have paid total sales charges of approximately 12.8% over a two-year period.
Because of the long-term nature of UITs, their structure, and their costs, short-term trading of UITs may be unsuitable.
FINRA found that from January 2011 through December 2015, Oppenheimer executed more than $6.4 billion in UIT transactions that generated more than $68.6 million in sales charges. The $6.4 billion in UIT transactions included more than $753.9 million in proceeds from transactions in which 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 new UITs (“early rollovers”). Approximately $237.1 million of the proceeds were for transactions in which customers sold UITs more than 100 days prior to their maturity dates and used some or all of the proceeds to purchase a subsequent series of the same UIT, which, as noted above, had, in many cases, the same or similar investment objectives and strategies as the prior series (“series-to-series early rollovers”).
FINRA likewise found that Oppenheimer failed to establish and maintain a supervisory system, and to establish, maintain, and enforce written supervisory procedures reasonably designed to supervise the suitability of representatives’ recommendations to customers as they pertain to early rollovers of UITs. Oppenheimer’s failures were in violation of FINRA Rule 3110, which requires reasonable supervision, and FINRA Rule 2111, which requires that FINRA members have a reasonable basis for each recommended securities transaction.
Based on its findings, FINRA entered a censure of Oppenheimer, fined it $800,000 and ordered it to pay $3,874,206.90 in restitution to affected customers.