The Financial Industry Regulatory Authority 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 for failing to supervise its representatives’ short-term trades of unit investment trusts.
A unit investment trust (UIT) is an investment company that offers units in a portfolio of securities that terminates on a specific maturity date, often after 15 or 24 months.
UITs impose a variety of charges, including a deferred sales charge and a creation and development fee, that can total approximately 3.95% for a typical 24-month UIT. According to FINRA, a registered representative who repeatedly recommends that a customer sell his or her UIT position before the maturity date and then “rolls over” those funds into a new UIT causes the customer to incur increased sale charges over time.
“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,” Susan Schroeder, FINRA executive vice president and head of enforcement, said in a statement. “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.”
According to the letter of acceptance, waiver and consent, FINRA found that from January 2012 through June 2015, hundreds of Morgan Stanley representatives executed short-term UIT rollovers — including UITs rolled over more than 100 days before maturity — in thousands of customer accounts.
FINRA further found that Morgan Stanley failed to adequately supervise representatives’ sales of UITs by providing insufficient guidance to supervisors regarding how they should review UIT transactions to detect unsuitable short-term trading, failing to implement an adequate system to detect short-term UIT rollovers, and failing to provide for supervisory review of rollovers prior to execution within the firm’s order entry system. Morgan Stanley also failed to conduct training for registered representatives specific to UITs.
In assessing sanctions, FINRA recognized Morgan Stanley’s cooperation in having initiated a firmwide investigation that included interviewing more than 65 firm personnel and the retention of an outside consultant to conduct a statistical analysis of UIT rollovers at the firm. The firm also identified customers affected and established a plan to provide remediation to those customers.
As a result of this case, FINRA launched a targeted exam in September 2016 focused on UIT rollovers. In addition, in its 2017 Exam Priorities Letter, FINRA highlighted that it was evaluating firms’ ability to monitor for short-term trading of long-term products.
In settling this matter, Morgan Stanley neither admitted or denied the charges, but consented to the entry of FINRA’s findings.
“The firm is pleased to have resolved this matter and to have been recognized by FINRA for its extensive cooperation,” it said in a statement.
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