$13M in Fines and Restitution for Failure to Supervise UIT Sales

FINRA Sanctions Morgan Stanley $13 Million in Fines and Restitution for Failure to Supervise Sales of UITs

More than 3,000 Morgan Stanley Smith Barney LLC customers across the country may have suffered financial losses.   FINRA found Morgan Stanley failed to supervise its representatives’ short-term trades of Unit Investment Trust (UITs).  FINRA fined Morgan Stanley $3.25 million dollars and required the firm to pay approximately $9.78 million dollars in restitution to all the affected customers.

A UIT is an investment company that offers units in a portfolio of securities.  The UIT terminates on a specific maturity date.  Often this date is after 15 to 24 months.  UITs also have a variety of charges.  These charges can total approximately 3.95% for the typical 24 month UIT.  When a registered representative repeatedly recommends that a customer sell his or her UIT position before the maturity date, then “Roll Over” the funds into a new UIT it causes the customer to incur increased sale charges over time.  This raises suitability concerns.

FINRA found that hundreds of Morgan Stanley representatives executed short-term UIT rollovers from January 2012 through June 2015.  These included UITs rolled over more than 100 days before maturity in thousands of customer accounts.

FINRA’s Executive Vice President and Head of Enforcement, Susan Schroeder, said, “Due to the long-term nature of UIT’s, their structure, and upfront costs, short-term trading of UIT’s 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.”

Morgan Stanley neither admitted or denied the charges, but consented to the entry of FINRA’s findings in the settlement of this matter.

As a result of this case, FINRA  launched an exam in September 2016 focused on UIT rollovers.  FINRA is evaluating firms’ ability to monitor for short-term trading of long-term products.