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NEWSLETTERS & ALERTS
UITs: Failed Supervision at Hennion and Walsh
by Howard Haykin
WHAT WENT WRONG. Between December 2011 and December 2016 (the "Relevant Period"), certain Hennion & Walsh RRs recommended 645 early exchanges of proprietary UITs in the same series (a ‘series-to-series switch’) in 438 customer accounts that had substantially similar investment objectives and portfolios. Such series-to-series switches, which FINRA deemed unsuitable, resulted in over $305,000 in unnecessary sales charges.
- RRs did not reasonably assess whether the alleged benefits to the customers from the switches outweighed the additional sales charges the customers would incur by making the switch – and therefore, they did not have a reasonable basis to recommend these series-to-series switches.
- Hennion & Walsh did not provide reasonable guidance to its sales staff on the special suitability concerns raised by early series-to-series switches.
- While the firm’s written procedures stated that switch forms should be signed by the customer for UIT exchanges, it did not enforce this procedure.
- The firm's supervisory system was not reasonably designed to address early exchanges of a UIT - including a series-to-series switch - even though these are red flags that indicate potentially unsuitable transactions.
- Although the firm’s trade-alert system flagged UIT switches, the firm did not provide reasonable guidance in its procedures, or otherwise to supervisors, on how to evaluate such switches.
- The principal at the firm tasked with much of the day-to-day trade-review responsibilities did not receive training on how to evaluate series-to-series switches and he did not take into account the increased costs associated with an early exchange.
- Thus, although an early exchange of a UIT, including a series-to-series switch, is a red flag of a potentially unsuitable transaction, the Firm's supervisory system was not reasonably designed to address such transactions.
This case was reported in FINRA Disciplinary Actions for March 2019.
For further details, go to ... FINRA Disciplinary Actions Online, and refer to Case #2013039202501.