The Financial Industry Regulatory Authority (“FINRA”) has fined and sanctioned SagePoint Financial, Inc. for failing to supervise early rollovers in Unit Investment Trusts (“UITs”).
A Unit Investment Trust (“UIT”) is a 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 2013 through December 2017, SagePoint failed to establish and maintain a supervisory system and failed to establish, maintain, and enforce written supervisory procedures (WSPs) that were reasonably designed to supervise the suitability of representatives’ recommendations to customers for early rollovers of Unit Investment Trusts.
In its findings, FINRA stated that SagePoint executed more than $895 million in UIT transactions that generated more than $17.2 million in sales charges. The $895 million in UIT transactions included more than $203.7 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 $65.8 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).
Likewise, FINRA found that SagePoint failed to establish and maintain a supervisory system and failed to establish, maintain, and enforce written supervisory procedures reasonably designed to supervise the suitability of representatives’ recommendations to customers for early rollovers of UITs. SagePoint’s WSPs did not discuss early rollovers or series-to-series early rollovers or otherwise provide guidance to firm supervisors about how to monitor for potentially unsuitable patterns of early rollovers or series-to-series early rollovers.
Finally, FINRA found that SagePoint did not use automated reports, alerts, or similar tools to supervise for potentially unsuitable patterns of early UIT rollovers. Similarly, the firm’s review of UIT transactions through its order entry system was not focused on suitability concerns related to early UIT rollovers. As a result, SagePoint did not identify that firm representatives recommended potentially unsuitable early rollovers, including series-to-series early rollovers, which caused customers to incur $1,315,373.01 in sales charges that they would not have incurred had they held the UITs until their maturity dates.
As such, FINRA found SagePoint violated NASD Rule 3010 (for conduct before December 1, 2014), FINRA Rule 3110 (for conduct on or after December 1, 2014), and FINRA Rule 2010.
Based on FINRA’s findings, SagePoint consented to entry of a censure; a fine of $300,000; and restitution to its affected customers in the total amount of $1,315,373.01, plus interest.