Recently, the Financial Industry Regulatory Authority (“FINRA”) announced that it ordered Stifel, Nicolaus & Company, Incorporated  (“Stiffel”) to pay approximately $1.9 million in restitution, plus interest, to more than 1,700 customers in connection with early rollovers of Unit Investment Trusts (“UITs” ) also known as UIT switches. It also fined the firm $1.75 million for providing inaccurate information to customers related to rollover costs incurred, and for related supervisory violations. 

What is a UIT? 

A Unit Investment Trust is a SEC-registered investment company that offers investors shares or “units” in a fixed portfolio of securities in a one-time public offering. A UIT terminates on a stated maturity date, often after 15 or 24 months, at which time  the underlying securities are sold and the proceeds are paid to the investors. Generally, a UIT’s portfolio is not actively managed between the date it is issued and its maturity date. UITs are meant to be held for the duration of their terms, and are not meant to be traded like stocks.

UIT sponsors typically offer UIT product lines in successive “series,” with the offering periods for new series usually coinciding with the maturity date of prior series. Successive series of UITs often have the same or similar investment objectives and investment strategies as the prior series, even if the portfolio of securities held by the UIT changes from series to series. When a broker recommends that a customer sell a UIT position before the maturity date and then “rolls over” those funds into a new UIT, this causes the customer to incur increased sale charges. When this happens, it is possible that this early rollover is unsuitable—and only driven by a broker’s desire for commissions.

UIT Switches Can Be Costly 

According to FINRA, from January 2012 through December 2016, Stifel brokers made approximately $10.9 billion in UIT transactions – $935.2 million of which were early rollovers. In examining these trades, FINRA found the firm’s supervisory system and procedures were not reasonably designed to supervise whether in fact these early rollovers were suitable. These trades may have caused customers to incur approximately $1.9 million in sales charges that they would not have incurred had they held the UITs until their maturity dates. 

There are a number of upfront sales charges when a customer buys a UIT. Stiffel customers were charged :
(1) an initial sales charge, which was generally 1% of the purchase price;
(2) a deferred sales charge, which was generally up to 2.5% of the offering price; and
(3) a creation and development fee (“C&D fee”), which was generally 0.5% of the offering price.

If the proceeds from the sale of a UIT were “rolled over” to fund the purchase of a new UIT, UIT sponsors often waived the initial sales charge, but still applied the deferred sales charge and C&D fee. A registered representative who recommended the sale of a customer’s UIT before its maturity date and used the sale proceeds to purchase a new UIT would cause the customer to incur greater sales charges than if the customer had held the UIT until maturity. For example, a hypothetical customer who purchased a 24-month UIT and held it until maturity would have paid a sales charge of about 3.95%. However, if after six months, the customer rolled over the UIT into a new UIT, he or she would have paid an additional 2.95% in sales charges. And, if the customer repeatedly rolled over the existing UIT into a new UIT every six months, he or she would have paid total sales charges of approximately 12.8% over a two-year period.

What is a UIT Switch?

Early selling of a UIT before its maturity date, and immediately buying another UIT is called “switching.” Brokers must not recommend that a customer switch from one UIT to another based on the compensation that the broker will receive for effecting the switch. Generally, under firm policies and procedures, the broker must document their reasons for switching a customer from one UIT to another. This documentation is usually done by what is known as a “switch letter.” In the switch letter, which a client is asked to sign, the investment reasons for the buy and sell of the UIT and the costs and fees associated with the buy and sell, must be clearly disclosed. 

In the case of Stiffel, FINRA found that Stifel sent more than 1,200 switch letters in connection with early UIT rollovers. The switch letters were intended to provide customers with necessary information about the switch transaction, and according to Stiffel’s written supervisory policies, confirm a customer’s “understanding of the transaction [switch] as well as the related risks and expenses.” Customers were required to sign and return the letter to Stiffel acknowledging the switch transaction. But, Stiffel did not verify the accuracy of the information contained in certain of the switch letters, and approximately 639 of the 1,200 UIT switch letters

sent either contained inaccurate information regarding the costs incurred by customers in connection with the switch or failed to specify the costs. 

For example, one switch letter stated that the overall sales charges associated with the switch were $1,000 when they were, in fact, $1,969. Collectively, the 639 switch letters disclosed sales charges of approximately $330,440, when the actual sales charges incurred by customers were more than $1,249,052.

Stiffel was not the first firm to be fined as a result of UIT switching. In 2017, Morgan Stanley was fined for similar conduct. FINRA found that, during the relevant period, Morgan Stanley made more than 33.4 billion on UIT trades, including 5.2 billion in UIT trades in early rollovers defined as being sold more than 100 days before the maturity date. FINRA sanctioned Morgan Stanley’s failure to supervise these UIT switches and make proper disclosures to its customers because UITs were not included in the firm’s definition of “switch.” 

UITs, Mutual Funds and Annuities Should not be “Switched”

UITs and other types of investments such as mutual funds and annuities are meant to be held as long-term investments and many have features which penalize an investor for an early withdrawal or termination. When a broker sells these investments before their maturity date, only to buy another similar investment, that buys and sell recommendation must be suitable, and explained to the customer. If the trade is purely commission driven, such a transaction is unsuitable and the customer may be entitled to recovery.

Protect Yourself – Get an Investor Fraud Lawyer to Represent You or Your Family 

If you or a loved one has been the victim of a mutual fund, annuity, or UIT switching,  or any other type of investment fraud, then you need an experienced, aggressive securities fraud attorney to zealously pursue your case against the perpetrators. We invite you to contact securities attorney Melanie Cherdack.    

Because she has been in the trenches as a former Wall Street attorney, investor fraud lawyer Melanie Cherdack and her team of experienced attorneys have seen just about every type of investment fraud or investment scam. While almost every investment carries a degree of uncertainty and risk, you may have been unnecessarily exposed to such risk due to the actions of others.  

If you have lost money due to investment fraud or simple broker negligence, it is crucial to hire a lawyer who fully understands this area of law. Former Wall Street securities attorney Melanie S. Cherdack represents individual and institutional investors who are unwitting victims of investment fraud and broker negligence. She heads up a group of attorneys who represent investors across the United States. Contact us by filling out our online contact form, or calling 888-768-2499.