Subscribe to our mailing list

* indicates required







We seek to provide information, insights and direction that may enable the Financial Community to effectively and efficiently operate in a regulatory risk-free environment by curating content from all over the web.


Stay Informed with the latest fanancialish news.




Regulatory Sanctions

Broker Nabbed on UIT Switch Transactions – ‘Form Over Substance’ Violations

November 4, 2017

[Photo: YouTube]


by Howard Haykin


Regulators view switching in and out of Unit Investment Trusts and other prospecuts products with scepticism, heightened scrutiny and greater attention to detail. So, when customers engage in such transactions, a broker had better make sure he or she is "dotting all the i's" and "crossing all the t's" - because FINRA will allow very little wiggle room when examining trade documentation.


James Maendel agreed to a $10K fine and a 45-day suspension to settle FINRA charges that he negligently caused his member firm to maintain inaccurate records with respect to 48 transactions in which a customer liquidated a prospectus product – i.e., traded and non-traded REITs - to purchase another prospectus product.


Prospectus products are defined to include open-end mutual funds, unit investment trusts (UITs), variable products, traded and non-traded REITs, and structured products.


BACKGROUND.    Maendel, a resident of White Lake, MI, has 17 years’ experience with 6 firms. He holds a Series 7 General Securities Rep license. From September 2010 to January 2015, Maendel was associated with LPL Financial. He currently is associated with another FINRA member firm. He does not have any relevant disciplinary history.


FINRA FINDINGS.    Between December 2012 and January 2015, James Maendel negligently caused his firm to maintain 2 distinct types of inaccurate books and records with respect to 48 transactions in which a customer liquidated a prospectus product to purchase another prospectus product: (i) “switch forms;” and, (ii) trade blotters.


For such transactions, LPL required that brokers submit an “Investment Switch/Exchange Disclosure Form," which requires the broker to provide, among other things, the following information:


  • a narrative evaluation of the net investment advantage of the transaction to the customer.
  • the total amount of new or additional sales charges, transfer fees, and other costs associated with the purchase of the new investment; and,
  • the surrender charges. redemption fees. and other costs associated with the liquidated investment.


Maendel satisfactorily provided narrative evaluations by describing the anticipated qualitative advantages for the transaction – e.g., reflecting occasions where Maendel's customers exchanged products in different asset categories and market sectors in response to changes in their preferred allocations, with reference to major market events and longer-term forecasts.


However, Maendel caused 48 of the switch forms he submitted to LPL to contain inaccurate information about transaction costs. This occurred for 3 reasons. and some switch forms were inaccurate for more than one reason:


  • REASON ONE.   Rather than relying on the prospectus to obtain the sales charge and calculate any applicable rollover discount, Maendel relied on rules of thumb, informal conversations with wholesalers, and mistaken assumptions to prepare the switch forms. These methods were not reliable. As a result, Maendel incorrectly stated an erroneous sales charge on 46 switch forms.


  • REASON TWO.   On 2 occasions, Maendel used a placeholder sales charge figure on the switch forms that he neglected to correct before submitting the form. As a result, Maendel incorrectly stated the sales charges on those 2 switch forms.


  • REASON THREE.   On 12 occasions, Maendel failed to correctly account for deferred sales charges incurred on the products being liquidated. Prior to these transactions, Maendel would query his firm's account view system to obtain the liquidation value of the product (inclusive of deferred sales charges) and compare it to the portfolio value (exclusive of deferred sales charges) provided by an outside service. If the 2 values were identical, Maendel assumed there were no remaining deferred sales charges. This method proved inaccurate because Maendel mistakenly queried portfolio values from his firm's system, comparing them to the same portfolio values provided by the outside service. As a result, Maendel incorrectly calculated that there were no remaining deferred sales charges on 12 forms, which were inaccurate with respect to the effect of deferred sales charges on the transactions.


In addition, Maendel also caused his firm's trade blotter to be inaccurate with respect to 11 transactions he correctly reported as solicited on switch forms.


  • Maendel placed orders with a product-specific trading desk to effect UIT transactions at LPL. He communicated to the desk whether the order should be marked as solicited or unsolicited on the trade blotter. When Maendel's clients had significant input on a transaction or initially approached Maendel with general investment ideas that subsequently resulted in a recommendation, Maendel relied on an incorrect and inconsistent standard to determine whether the transaction should be considered solicited or unsolicited. As a result, on 11 occasions, the switch forms that Maendel personally prepared reflected that the transaction was "solicited," but Maendel caused the transaction to be incorrectly recorded by the desk on the firm's blotter as “unsolicited."


FINANCIALISH TAKE AWAYS.     LPL Financial said it terminated Maendel January because of “short-term trading of unit investment trusts and inaccurate disclosures regarding unit investment.”


In response, Maendel defended his position with the following comments:


“there have never been any client complaints either orally or in writing regarding any trades in question. these trades were all done in direct consultation with clients, and with the required documentation completed and signed by my clients, myself and appropriate supervisors. the short-term holding periods mentioned resulted directly from my best efforts as financial advisor to respond to individual client concerns to mitigate portfolio risk in sectors where fundamentals appeared to be shifting, including the energy sector which we exited safely when oil broke support and before the subsequent strong decline in the second half of 2014. the inaccurate disclosures cited were miscalculations, and unintentional.”


While Maendel undoubtedly acted in the best interests of his customers, he apparently committed unintentional errors in his disclosures and calculations. And so he bit the bullett, paid the consequences, and moved on. I wonder if he continues to dabble in prospectus product switches at his new firm.


This case was reported in FINRA Disciplinary Actions for September 2017.

For details on this case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2015044365601.