Following a compliance review of sales practices involving reps recommending early rollovers of unit investment trusts, the U.S. Financial Industry Regulatory Authority Inc. (FINRA) settled with six brokerage firms, which agreed to pay millions in restitution to around 10,000 investors.
A targeted review of industry practices concerning unit investment trusts found that thousands of investors were harmed when reps recommended that they roll over their holdings early, generating greater sales charges than if they were held to maturity.
Unit trusts are investment vehicles that offer shares in a fixed portfolio that matures on a specific date, which “are generally intended as long-term investments and have sales charges based on their long-term nature, including deferred sales charges, and a creation and development fee.”
Rolling over these holdings before maturity can result in excessive charges, which raises suitability concerns, FINRA said.
After settling with one firm that failed to prevent early rollover recommendations among its reps, FINRA launched an industry sweep, which has now resulted in several additional settlements.
FINRA said it “identified similar supervisory failures at six additional firms, all of which agreed to settlements requiring the firms to pay a total of US$16.8 million in restitution and US$6.6 million in fines.”
“These cases should serve as a clear reminder to member firms to ensure their supervisory systems are reasonably designed to supervise sales of all the products they offer,” said Jessica Hopper, executive vice-president and head of FINRA’s enforcement division, in a release.
“Firms should be particularly vigilant in identifying representatives who recommend trading strategies intended to generate commissions for the representative without regard for the intended use of the product,” she added.