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Investments - Strategies

UIT Investing – Like ‘Watching Grass Grow’

June 30, 2020

[Photo: Watching Grass Grow /]



by Howard Haykin



Some brokers who put their customers into Unit Investment Trusts, or UITs, might say this sort of investing is like “watching grass grow.”  Which might explain why an Oppenheimer & Co. broker allegedly engaged in an unsuitable pattern of short-term trading of UITs in customer accounts. [Of course, another explanation is that he tried profiteering from increased commission revenues.]



A UIT is a SEC-registered investment company that … offers investors shares or "units" in a fixed portfolio of securities via 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. A UIT's portfolio is not actively managed between the trust's inception and its maturity date. A customer who purchased, say, a 24-month UIT and held it until maturity might pay a sales charge of about 3.95%. However, a customer who sold that UIT before maturity and used the sale proceeds to purchase a new UIT, would incur about 3% in additional sales charges.



WHAT WENT WRONG.    Over a 4-1/2 year period, the Oppenheimer broker recommended that his customers roll over UITs more than 100 days prior to maturity on approximately 1,000 occasions. Indeed, although his customers' UITs typically had a 24-month maturity period, the broker recommended that they sell their UITs after holding them for, on average, only 393 days (around 13 months), and use the proceeds to purchase a new UIT. FINRA deemed these recommendations unsuitable, in part because Oppenheimer's customers incurred unnecessary sales charges - which the firm reimbursed to the customers. The broker, meanwhile, lost his job and was hit with a 3-month suspension and a $5,000 fine.



INVESTOR TAKE AWAY.    This case further illustrates why investors should adopt a “buy and hold” investment strategy and, where practicable, hold securities until maturity date.



[For further details, click on … FINRA Case #2018060228201.]