FINRA Fines Wells Fargo and Merrill Lynch Millions of Dollars Over UIT Misconduct
Investors Should Be Wary of UITs — Even from Trusted Names in Finance
The Financial Industry Regulatory Authority (FINRA) recently completed a targeted examination of several firms suspected of misconduct involving Unit Investment Trusts (UITs). As a result of the exam, FINRA has ordered six firms to return $17 million to their investors. FINRA alleges unsupervised brokers recommended that investors use short-term trading strategies for long-term UIT investments, resulting in unnecessary sales charges.
Why did so many brokers make these detrimental recommendations? Investments in UITs often come with large commissions for brokers. These commissions incentivize less-than-honest business practices.
Firms should always make investors aware of whether their broker earns a commission for an investment recommendation. Under Regulation Best Interest, broker-dealers are required to disclose any potential conflicts of interest as well as any fees and costs associated with a transaction. If your broker recommended you sell shares of a UIT before its maturity date, get in touch with a securities lawyer today.
What Are Unit Investment Trusts?
Unit Investment Trusts are pooled investments in stocks or bonds. UIT managers, or sponsors, pick the securities. These pooled investments are not actively managed and mature after a set number of months — usually 15 or 24 months, although UITs can take decades to mature. Once they mature, the investor collects their interest, assuming the UIT generated a return.
If an investor wants to invest their proceeds in another UIT with the same sponsor, the sponsor will often waive the sales fee. Using funds from one UIT to invest in another is called a series-to-series rollover.
If an investor sells their shares of a UIT before the maturity date in order to roll over their funds into a new UIT, the investor will have to pay new sales fees. In many cases, these sales charges are not in the investor’s best interest, particularly if the investor is selling shares of one UIT in order to purchase shares of a UIT with the same or very similar investing strategy. Investors would almost always be better off waiting for the UIT to mature before executing the series-to-series rollover. Always question a broker who recommends selling or rolling over a UIT before its maturity date.
What Is a “Targeted Examination?”
Targeted exams, also known as “sweeps,” aim to catch widespread misconduct. Sweeps usually target specific firms that have aroused FINRA’s suspicions. These firms have the ability to flag suspicious UIT recommendations. There is no valid reason for a financial institution to overlook this type of misconduct.
Wells Fargo Ordered to Repay Over $2.4 Million
Wells Fargo Clearing Services and Wells Fargo Advisors Financial Network were among the first firms to settle with FINRA following the targeted exam. FINRA alleged that Wells Fargo did not do enough to protect investors and has ordered them to repay over $2 million to their customers, in addition to a $600,000 fine.
Wells Fargo entered into an Acceptance, Waiver, and Consent agreement with FINRA, which allows them to consent to the findings without admitting or denying the findings. As part of the terms of the agreement, Wells Fargo consented to the findings that they failed to reasonably supervise their representatives. Wells Fargo consented to the findings that they did not have a system in place to flag brokers who recommended investors redeem shares of a UIT well in advance of the maturity date. According to FINRA, this resulted in investors paying $2,458,762.33 in unnecessary sales charges.
Wells Fargo’s Track Record of Regulatory Fines
Jessica Hopper, the Head of FINRA enforcement, stated that the UIT exam “reflects FINRA’s commitment to proactively identifying problems and providing restitution to harmed investors. 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.”
These cases should also remind investors that large, well-known financial institutions like Wells Fargo do not necessarily have the best business practices. This latest fine comes on the heels of a $1 billion fine handed down in 2018 following allegations that Wells Fargo had charged unfair interest rates on mortgages and car loans. After Wells Fargo failed to repay customers in a timely manner, regulators fined Wells Fargo again, this time for $250 million.
Merrill Lynch Fined $3.25 Million Over UITs
Wells Fargo is not the only major financial institution to fail to supervise its brokers’ UIT recommendations. Merrill Lynch recently agreed to pay a fine of $3,250,000 in fines and a restitution payment of $8,437,223.38 to their customers who paid unnecessary sales charges following UIT series-to-series rollovers.
FINRA Investor Alert
FINRA issued an investor alert on Unit Investment Trusts. In the alert, they highlighted the need for investors to ask questions before they agree to a series-to-series rollover, particularly if a broker recommended they redeem their shares before the UIT’s maturity date.
Questions to Ask:
- Before agreeing to a series-to-series rollover, investors should ask if they could accomplish the same investment objectives by simply waiting and rolling over their funds once the UIT has matured. In several FINRA settlements, firms have consented to the findings that the UIT rollover rolled over funds from one UIT to another UIT that had very similar investment strategy and investment goals.
- How much will the UIT cost? All UITs come with sales charges and management fees, which can eat into the investor’s return.
- What are the tax implications of gains from a UIT? Is the UIT taxable or tax-advantaged? Investors may have to pay capital gains taxes before moving forward with a rollover.
- Is there a chance the UIT will terminate early? Some UIT sponsors will reserve the right to terminate the investment company under certain circumstances. These circumstances will be specified in the UIT’s prospectus.
What Do I Do If I Paid Excessive Fees for a Unit Investment Trust?
Investors often do not come prepared with these types of questions — it’s natural to assume you can trust your broker’s expertise. Unfortunately, high commissions and the frequent lack of supervision in large firms works against investors. If you lost money on a UIT rollover, you may still be able to recover your losses through FINRA arbitration.
