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Short-Term Trading of UITs in Customer Accounts - Sanctioning the Broker-Dealer
by Howard Haykin
Berthel, Fisher & Company Financial Services agreed to pay a $225K fine, $117K in restitution, and $300K in disgorgement to settle FINRA charges that one of its registered reps recommended and effected a pattern of unsuitable short-term Unit Investment Trusts (“UITs”) trading in customer accounts.
Berthel Fisher also agreed to retain an independent consultant to conduct a comprehensive review of the firm’s policies, systems and procedures, and its training relating to all products that it offers to customers, including but not limited to UITs and mutual funds.
UITs are investment companies that offer shares of a fixed portfolio of securities in a one-time public offering and terminate on a specified maturity date. As such, they are not designed to be used as trading vehicles. In addition, UITs typically carry significant upfront charges and, as with mutual funds that carry front-end sales charges, short-term trading of UITs is generally improper.
FINRA FINDINGS. Berthel Fisher, a FINRA member since 1974 that’s based in Cedar Rapids, IA, has around 350 registered individuals who operate out of some 230 branch offices.
Over a 2-year period – 2013 and 2014 – one broker generated approximately $417,000 in concessions for himself and his firm by recommending and effecting a pattern of unsuitable short-term trading of UITs for 12 customers - many of whom were seniors, unsophisticated investors, or both. The transactions were unsuitable on several counts.
- UIT positions were liquidated only months after being purchased on the broker’s recommendations;
- Proceeds from those ‘short-term sales’ were used to purchase other UITs.
- Broker designed his recommendations to prevent his customers' UIT purchases from qualifying for sales charge discounts – by spreading smaller purchases over multiple days to avoid reaching the $50K and $100K "breakpoints.”
Berthel Fisher, in turn, enabled these unsuitable transactions due to in adequate supervision of UIT trading. Specifically:
- Over the 2-year period, the firm limited its supervision of UITs to manual reviews of daily trade blotters that did not indicate either how long UIT positions had been held before liquidation or the source of funds used to purchase new UITs.
- Over a 3-year period (2013-2015), the firm’s supervision of mutual funds (“MFs”), as with UITs, lacked any methods, reports, or other tools to identify fund switching or trading patterns indicative of other misconduct.
- Over the respective 2- and 3-year periods, the firm’s supervisory system could not ensure that UIT and MF fund customers received all sales-charge discounts to which they were entitled. Instead, the firm relied on its brokers and its clearing firm to determine whether UIT and MF purchases should receive sales-charge discounts.
POSTSCRIPT. FINRA drilled down further and found that, from 2010 through 2014, more than 2,700 Berthel customers did not receive applicable sales-charge discounts on UIT purchases – meaning they incurred $667,000 in excessive sales charges. In consultation with FINRA, Berthel Fisher acknowledged that it had missed the discounts identified above and paid restitution to the affected customers in 2015.
This case was reported in FINRA Disciplinary Actions for April 2018.
For details on this case, go to ... FINRA Disciplinary Actions Online, and refer to Case #2014039169601.