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Regulatory Sanctions

Trading UITs in Client Accounts While Cetera Managers Looked the Other Way

September 14, 2017

by Howard Haykin


One day – hopefully soon – FINRA will redefine its standards for (or reinforce its regulation over) firms that fail to supervise unsuitable trading in customer accounts.


Christopher Hickman agreed to pay around $121,000 in fines, restitution and interest, and to serve a 5-month suspension, to settle FINRA charges that he engaged in an unsuitable pattern of short-term trading of UITs in customer accounts.


BACKGROUND.    Hickman a resident of Boynton Beach, FL, became registered in 2001 as a General Securities Rep. He joined Cetera Advisors in September 2009 and remained with that firm until 7/2/15, when he was U5’d for “frequent short term fixed-income securities trading in customer accounts under Firm review." Hickman is not presently associated with a FINRA member firm.


Hickman had no relevant prior disciplinary history – though FINRA BrokerCheck notes that several customer disputes over unsuitable recommendations from 2002 to 2010 had been settled over the years.


FINRA FINDINGS.    Between May 2011 and April 2014, Hickman engaged in an unsuitable pattern of short-term trading of Unit Investment Trusts (''UITs") in 6 customer accounts. During the 3-year period in question, Hickman repeatedly recommended that customers purchase UITs and then sell these products within a year of purchase. The UITs that Hickman recommended had maturity dates of 24 months or longer and carried sales charges of up to 3.95%. Indeed, the average holding period for the UITs purchased in these six customers' accounts was just 136 days. 


In addition. on several occasions, Hickman recommended thot his customers use the proceeds from the short-term sale of a UIT to purchase another UIT with similar or even identical investment objectives. As a result of these transactions, the 6 customers incurred losses of around $116,000.


UITs are investment companies that offer shares of a fixed portfolio of securities in a one-time public offering, and terminate on a specified 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 presumptively improper.


FINANCIALISH TAKE AWAYS.    According to FINRA BrokerCheck, Hickman’s employer, Cetera Advisors, agreed in 2015 to pay over $700,000 in fines and restitution to settle FINRA charges that the firm failed to identify and apply sales charge discounts to certain customers’ eligible purchases of UITs. The firm relied primarily on its RRs to ensure that customers received appropriate UIT sales charge discounts.


Apparently, Cetera Advisors’ supervisory failures extended to monitoring customer accounts for unsuitable short-term trading in UITs. While Hickman’s short-term trading escalades played out from 2011 to 2014, Cetera did not terminate him until 2015! 


And, of course, FINRA did not sanction Cetera for the supervisory failures in this case. FOR ITS FAILURE TO REGULATE, FINRA IS FINED ONE CENTAVO!


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

For details on this case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2015046087601.