Merrill Lynch submitted a Letter of Acceptance, Waiver, and Consent (AWC) to FINRA regarding the firm’s failure to establish and maintain a supervisory system reasonably designed to comply with suitability rules for Unit Investment Trusts, also known as UITs. The conduct at issued violated FINRA Rules 3110 and 2010. Merrill Lynch’s AWC letter is available here.
Merrill Lynch describes a UIT as an investment company offering units in a “fixed portfolio of securities in a one-time public offering.” UITs end on a set maturity date. At termination, the underlying securities are sold and any proceeds are to be paid to the investors. According to Merrill Lynch, “UITs impose a variety of upfront sales charges.” The AWC gave as an example: (1) an initial sales charge, generally 1% of the purchase price; (2) a “deferred sales charge,” generally up to 2.5% of the offering price; and (3) a “creation and development fee,” generally .5% of the offering price.
There are often other fees, according to Merrill Lynch. Most “UITs charged annual operating expenses that were paid to the sponsor out of the assets of the UIT.”
Customers who sold a UIT before maturity and used the proceeds to buy a new UIT would pay higher fees than if the customer held the first UIT until maturity. Merrill Lynch conceded, “Because of the long-term nature of UITs, their structure, and their costs, short-term trading of UITs may be unsuitable.”
Over five years, Merrill Lynch executed around $32 billion UIT transactions in more than 185,000 accounts. This “included approximately $2.5 billion in transactions in which UITs were sold more than 100 days before their maturity dates and some or all of the proceeds were used to purchase on or more new UITs.” Merrill Lynch called these transaction “early UIT rollovers,” and “Merrill Lynch did not establish a supervisory system that was reasonably designed to identify certain early UIT rollovers.” According to the AWC, “early UIT rollovers may have caused customers to pay $8,437,223.38 in sales charges that they would not have incurred had they held the UITs until their maturity date.”
FINRA ordered Merrill Lynch to pay more than $8.4 million in restitution and fined the firm an additional $3.25 million.