FINRA is ordering Morgan Stanley Smith Barney LLC (MS) to pay about $9.8M in restitution to and a $3.25M fine for purportedly not properly supervising hundreds of financial representatives who sold short-term trades of UITs. The firm settled without denying or admitting to the regulator’s charges.
According to the self-regulatory organization, from 2/2012 through 6/2015, the brokerage firm’s representatives effected short-term UIT rollovers, including a number of them more than 100 days prior to maturity, in customer accounts. FINRA said that the firm did not properly supervise these reps, when they engaged in the UIT sales, nor did it properly train them regarding the investments. It also purportedly failed to give supervisors adequate guidance about how to study transactions for signs of unsuitable short-term trading. Morgan Stanley is accused of failing to put into effect a system “adequate” enough to identify short-term UIT rollovers and of not providing supervisory assessment for UIT rollovers before execution.
UITs
Unit investment trusts are investment companies that offer units in a securities of a portfolio. They are subject to termination on a certain maturity date, usually after 15 months or 24 months. They typically come with certain fees, including a creation fee and a deferred sales charge. According to FINRA, when a new UIT compels a customer to be pay higher sales charges over time, this could be a red flag indicating suitability issues.
FINRA said that during the period at issue, Morgan Stanley executed over $33.4B in UIT transactions resulting in over $650M in sales commissions and credits. Over $5.2M in the UIT transactions included early rollovers.
Regarding its purportedly inadequate detection system for identifying what could be an unsuitable short-term UIT rollover, Morgan Stanley’s order entry system is supposed to notify supervisors about short-term UIT switches, meaning that the UIT sale is taking place within 60 days of a UIT sale or an open-end mutual fund sale. It is at this point that the firm representative has to give good reason for the switch and the supervisor should review and approve the transaction before it goes through.
Upon supervisor approval, Morgan Stanley is then supposed to let the customer know that there could be sales charges due to the switch. Instead, said FINRA, the firm did not include UIT rollovers under its definition of a “switch” during the relevant period. This is why when a Morgan Stanley representative would choose “rollover” as a reason for the UIT switch, the rollover was not sent to supervisors to assess and approve. Morgan Stanley also is accused of not providing the proper disclosure language upon confirmation of the UIT rollover.
In the wake of FINRA’s probe into Morgan Stanley and its purportedly inadequate supervision of UIT sales, the regulator introduced a targeted exam last year that concentrates on UIT rollovers.
At The SSEK Partners Group, our UIT fraud lawyers are here to help investors recoup their losses.
Meantime, the US Securities and Exchange Commission, on its website, offers a list of some of the traits of UITs, including that they usually:
· Are issued in redeemable units.
· Have a termination date.
· Don’t actively trade in their own portfolio for investing.
· Lack a board of directors, an investment adviser, or corporate officers.
Contact our securities law firm today.
Unit Investment Trusts (UITS), SEC
FINRA Sanctions Morgan Stanley $13 Million in Fines and Restitution for Failing to Supervise Sales of UITs, FINRA September 25, 2017