UIT Disciplinary Actions

In FINRA’s February monthly Disciplinary Actions report, there were 3 actions related to UITs.  Before we dive into each of these cases and discuss some lessons learned, it’s important to note that UIT’s were in FINRA’s 2018 Examination Priorities.  Listen to our session on some key take-aways or read our transcript below.

Hi everybody. This is Laurie Shen and George Mandl from ALLIA consulting. Today we’re going to talk about unit investment trusts and there were 3 different cases, disciplinary actions from FINRA back in February. We wanted to point to you, before we get into the details, I wanted to also mention that FINRA did put in unit investment trust as one of the areas they wanted to cover for in their 2018 examination priorities. So it’s interesting that we have three of them. So first one is Oppenheimer for $800,000 fine. A second company was $400,000 and then a third one for $150,000. So we should definitely listen to George and see what’s interesting and what are specific things we want to be looking out for. So George, tell me about one of the cases.

George Mandl (01:01):
Yeah, so the interesting case, the Oppenheimer case was a finding that there were inadequate supervisory controls or procedures in place to help supervisors detect a red flag. Early redemptions of UITs. They were relying on what appeared to be a blotter review. And there was no control for identifying the early redemptions from what I gather. So what they really needed was an exception report that identified early redemptions (over 100 days before maturity date) and required the supervisor to do some type of a review to see what reps did with the proceeds of that redemption and to challenge the representative about the actions they took – why they redeemed the UITs early and whether that was appropriate for them to roll the. In this case, they were rolling them into UIT’s that were not dissimilar to the ones that they redeemed earlier, which called into question for FINRA, the actions that the reps took.

Laurie Shen (02:09):
So it sounds like a couple of things – Supervision in terms of procedures, but also training for the supervisors to ensure that they know what they’re looking for and how to follow up. Automation, obviously manual blotters take a long time to review and depending on volume, that could be an issue. And really having the exception reports is key. Right. but not only having the exception reports, but also following up on the exception reports and knowing the right questions to ask is something that supervisors need to be aware of. So if firms are coming up to their 3130 and 3120 testing and reporting, this is a good opportunity to take a look and add those controls in place, if you don’t already have that. Please give us a call if you have any questions that we can help you with. Thank you.

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