FINRA Orders Merrill Lynch, Pierce, Fenner & Smith, Inc. to Pay $8.4 Million in Restitution to Customers for Supervisory Failures Involving Unit Investment Trusts

WASHINGTON—FINRA announced today that it has ordered Merrill Lynch, Pierce, Fenner & Smith, Inc. to pay more than $8.4 million in restitution to more than 3,000 customers who incurred potentially excessive sales charges in connection with early rollovers of Unit Investment Trusts (UITs). FINRA also fined the firm $3.25 million for failing to reasonably supervise early UIT rollovers.

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, often after 15 or 24 months. As a result, 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. 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 sales charges over time, raising suitability concerns.

Merrill Lynch executed more than $32 billion in UIT transactions between January 2011 and December 2015, including approximately $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 purchase one or more UITs (early rollovers). FINRA found the firm’s supervisory system was not reasonably designed to identify those early rollovers. While 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, the firm did not have any report that identified when a representative recommended an early UIT rollover that had been held for longer than seven months. As a result, Merrill Lynch did not identify that its representatives 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.

Jessica Hopper, Executive Vice President and Head of FINRA’s Department of Enforcement, said, “Customers often incur unnecessary costs when representatives recommend short-term sales of products that are intended as long-term investments. FINRA member firms must implement supervisory systems sufficient to identify these potentially unsuitable transactions. Providing restitution to harmed investors remains a top priority for FINRA.”

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. Investors can learn more about UITs by visiting FINRA’s Investor Insights.

In settling this matter, Merrill Lynch neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

About FINRA
FINRA is a not-for-profit organization dedicated to investor protection and market integrity. It regulates one critical part of the securities industry—brokerage firms doing business with the public in the United States. FINRA, overseen by the SEC, writes rules, examines for and enforces compliance with FINRA rules and federal securities laws, registers broker-dealer personnel and offers them education and training, and informs the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers a dispute resolution forum for investors and brokerage firms and their registered employees. For more information, visit www.finra.org.