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Regulation and Compliance > Federal Regulation > FINRA

Merrill to Pay More Than $11M Over UIT Rollovers

By Jeff Berman

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What You Need to Know

  • Merrill was ordered to pay more than $8.4 million in restitution to more than 3,000 clients.
  • The clients had incurred potentially excessive sales charges related to unit investment trusts (UITs).
  • FINRA also fined the firm $3.25 million for failing to reasonably supervise early UIT rollovers.

Merrill Lynch has been ordered by the Financial Industry Regulatory Authority to pay more than $8.4 million in restitution to more than 3,000 clients who incurred potentially excessive sales charges related to early rollovers of unit investment trusts (UITs), according to FINRA.

FINRA also fined the firm $3.25 million for failing to reasonably supervise early UIT rollovers, FINRA said Friday.

Merrill neither admitted nor denied the charges but consented to the entry of FINRA’s findings. Merrill signed a FINRA letter of acceptance, waiver and consent on June 4. FINRA signed it  Friday.

“We entered into a settlement to resolve concerns about early rollovers of certain Unit Investment Trusts between 2011 and 2015,” Merrill said in a statement provided to ThinkAdvisor. “We have addressed these concerns through enhancements to our supervisory system.”

A UIT is an investment company offering investors shares, or “units,” in a fixed portfolio of securities in a one-time public offering that ends on a specific maturity date, typically after 15 or 24 months. Therefore, 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,” FINRA explained.

A registered representative who recommends that a client sell his or her UIT position before the maturity date and then “rolls over” those funds into a new UIT causes that client to incur increased sales charges over time, raising suitability concerns, according to FINRA.

Merrill executed more than $32 billion in UIT transactions between January 2011 and December 2015, including about $2.5 billion in which the UITs were sold more than 100 days before their maturity dates and some or all of the proceeds were used to buy one or more UITs (early rollovers), FINRA alleged.

FINRA found that Merrill’s supervisory system was not reasonably designed to identify those early rollovers. Although the firm’s automated reports identified when a representative recommended an early rollover of a UIT that had been held for seven months or less, Merrill didn’t have any report identifying when a rep recommended an early UIT rollover that had been held for longer than seven months, according to FINRA.

As a result, Merrill failed to identify that its reps recommended “thousands of potentially unsuitable early rollovers that, collectively, may have caused more than 3,000 customer accounts to incur more than $8.4 million in sales charges that they would not have incurred had they held the UITs until their maturity dates,” FINRA alleged.

In September 2016, FINRA launched a targeted examination focused on UIT rollovers, and FINRA’s 2018 Regulatory and Examination Priorities Letter advised FINRA would be reviewing firms’ supervisory controls related to UITs.

(Photo: Shutterstock)

Jeff Berman

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