The Financial Industry Regulatory Authority (FINRA) has announced sanctions against Morgan Stanley Smith Barney LLC for failing to supervise the short-term trading of unit investment trusts (UITs). FINRA fined Morgan Stanley $3.25 million and required the firm to pay approximately $9.78 million in restitution to more than 3,000 affected customers who lost money as a result of the trades.
FINRA Finds Hundreds of Short-Term UIT Rollovers
From January 2012 to June 2015, FINRA found that Morgan Stanley brokers made hundreds of short-term UIT rollovers in thousands of customer accounts. Some of the UITs were rolled over more than 100 days before their maturity dates. UITs impose a variety of charges, including a creation and development fee, and a deferred sales charge. For a typical 24-month UIT, the fees can total approximately 3.95 percent. When brokers repeatedly recommend that a customer sell his or her UIT position before the maturity date—effectively “rolling over” those funds into a new UIT—it causes the customer to incur increased sales charges over time.
Morgan Stanley allegedly failed to adequately supervise its brokers’ UIT sales. FINRA claims that the firm:
- Failed to provide sufficient guidance to supervisors regarding how they should review UIT transactions to detect unsuitable short-term trading;
- Failed to implement an adequate system to detect short-term UIT rollovers, and;
- Failed to provide for supervisory review of rollovers prior to execution within the firm’s order entry system.
FINRA also found that Morgan Stanley failed to properly train brokers about UITs. The main cause of concern is unsuitability of UITs for customers. Susan Schroeder, FINRA’s Executive Vice President and Head of Enforcement, said, “Due to the long-term nature of UITs, their structure, and upfront costs, short-term trading of UITs may be improper and raises suitability concerns. Firms must adequately supervise representatives’ sales of UITs—including providing sufficient training—and have in place a system to detect potentially unsuitable short-term UIT rollovers.”
FINRA Launches Exam for UIT Rollovers
As a result of FINRA’s findings, FINRA launched a targeted exam focused on UIT rollovers in September 2016. This year, FINRA also announced it was evaluating a firms’ ability to monitor short-term trading of long-term products.
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