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Regulation and Compliance > Federal Regulation > FINRA

Oppenheimer to Pay $4.7M Over Early UIT Rollovers

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(Photo: Ronald Pechtimaldjian/ALM)

The Financial Industry Regulatory Authority has fined Oppenheimer & Co. for alleged supervisory failures involving early rollovers of unit investment trusts, FINRA announced Monday.

Pointing to the $3.87 million in restitution that FINRA ordered the firm to pay to customers who incurred potentially excessive sales charges because of those early rollovers, Jessica Hopper, senior vice president and acting head of FINRA’s Department of Enforcement, said in a statement that “providing restitution to investors remains a top priority for FINRA.”

FINRA member firms “must be mindful of costs to customers when recommending a product, particularly when recommending that customers make short-term sales of products that are intended as long-term investments,” she also said.

Oppenheimer declined to comment. However, without admitting or denying the findings, the firm on Dec. 17 signed a letter of acceptance, waiver and consent in which it agreed to provide that restitution to customers. Oppenheimer also agreed to pay a fine of $800,000 and a censure. FINRA accepted the letter Monday.

From January 2011 through December 2015, Oppenheimer executed more than $6.4 billion in UIT transactions, and $753.9 million of them were early rollovers, according to FINRA.

FINRA, however, discovered that the firm’s written supervisory procedures and supervisory system, which did not involve the use of automated reports or alerts, “were not reasonably designed to supervise the suitability of those early rollovers,” FINRA said.

Because of that, Oppenheimer “did not identify that its representatives recommended potentially unsuitable early rollovers that, collectively, may have caused customers to incur more than $3.8 million in sales charges that they would not have incurred had they held the UITs until their maturity dates,” according to FINRA.

In determining the fine against Oppenheimer, FINRA said it “recognized the firm’s extraordinary cooperation for having (1) provided substantial assistance to FINRA’s investigation, including by retaining an outside consultant to analyze the firm’s UIT trading and voluntarily sharing the results of the consultant’s analysis with FINRA; (2) developed and implemented a methodology that efficiently identified customers eligible for restitution; and (3) voluntarily employed corrective measures to revise its procedures to avoid recurrence of the conduct described above.” The latter included Oppenheimer establishing automated alerts to identify when representatives recommend early UIT rollovers, FINRA noted.

Raymond James was recently ordered by the Securities and Exchange Commission to pay a much steeper amount of money to settle a similar case. In that case, three Raymond James entities agreed to be censured and to disgorge about $12 million representing inappropriate client advisory fees and UIT commissions, together with prejudgment interest, and to pay a $3 million civil penalty for improperly charging advisory fees on inactive retail client accounts and charging excess commissions for brokerage customer investments in certain UITs.

In 2017, FINRA fined Morgan Stanley $3.25 million and required that 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 UITs.

A UIT is an investment company that offers investors shares, or “units,” in a fixed portfolio of securities in a one-time public offering that terminates on a specific maturity date, typically after 15 or 24 months, FINRA pointed out Monday. Due to those factors, UITs are “generally intended as long-term investments and have sales charges based on their long-term nature, including an initial and deferred sales charge and a creation and development fee,” according to FINRA.

A registered representative who “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, raising suitability concerns,” FINRA pointed out.


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