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Regulatory Sanctions

Short-Term Trading of UITs in Customer Accounts - Sanctioning the Financial Advisor

April 23, 2018

by Howard Haykin


A broker with 20 years of experience, a Series 8 license, and a clean disciplinary record typically generates few, if any, supervisory concerns. But, what if that broker has ‘lost that spark’, experiences reduced production, or has found a seemingly innocuous way to generate excess commission? [which is not necessarily what happened in this case] 


A broker with Morgan Stanley was fined $5K and given a 3-month suspension to settle FINRA charges that he engaged in an unsuitable pattern of short-term trading of Unit Investment Trusts (“UITs”) in customer accounts. The broker-dealer also paid a price - perhaps for its failure to supervise - by compensating its customers for the excess sales charges.


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.    The broker, a resident of upstate New York, has 25 years’ experience with 6 firms and holds the Series 8 General Securities Sales Supervisor license. Between July 2012 and December 2014 (the "Relevant Period"), the broker repeatedly recommended that 148 of his customer accounts purchase UITs and then sell these products before their maturity dates. The positions were held on average 285 days, even though a majority of the UITs had maturity dates of at least 24 months. The UITs carried costly sales charges ranging from 1.95% to 3.95%.


In addition, on hundreds of occasions, the broker recommended that his customers use the proceeds from the short-term sale of a UIT to purchase another UIT with similar or identical investment objectives.


FINANCIALISH TAKE AWAY.    Firms need to keep up their vigil for violative conduct by any and all of their associated persons. Needless to say, such efforts begin with maintaining up-to-date written supervisory policies and procedures, or WSPs, designed for their business models. It's 'lame advice', but that's just the way it is.



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 #2015047225601.