Unit Investment Trust Early Rollovers at Merrill Lynch Prompt Millions in FINRA Fines

June 26, 2021

FINRA recently disclosed that Merrill Lynch agreed to an Acceptance, Waiver and Consent (AWC), Case #2017053437701, relating to its failure to establish and maintain a supervisory system that was reasonably designed to achieve compliance with FINRA’s suitability rule as it pertains to early rollovers of Unit Investment Trusts (“UITs”). Because of the long-term nature of UITs, their structure, and their costs, short-term trading of UITs may be unsuitable.

What is a Unit Investment Trust?

A Unit Investment Trust is a SEC-registered investment company that offers investors shares or “units” in a fixed portfolio of securities in a one-time public offering. A UIT terminates on a specified maturity date, often after 15 or 24 months, at which point the underlying securities are sold and the resulting proceeds are paid to the investors. Generally, a UIT’s portfolio is not actively managed between the trust’s inception and its maturity date.

UITs impose a variety of upfront sales charges. In its AWC, FINRA states that a typical 24-month UIT contained three separate charges: (1) an initial sales charge, which was generally 1% of the purchase price; (2) a deferred sales charge, which was generally up to 2.5% of the offering price; and (3) a creation and development fee (C&D fee), which was generally 0.5% of the offering price.2If the proceeds from the sale of a UIT were “rolled over” to fund the purchase of a new UIT, UIT sponsors often waived the initial sales charge, but still applied the deferred sales charge and C&D fee.

Merrill Lynch – Failing to Supervise Early Rollovers of Unit Investment Trusts

Between January 1, 2011 and December 31, 2015, Merrill Lynch executed approximately $32 billion in UIT transactions across more than 185,000 accounts. The $32 billion in UIT transactions 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 one or more new UITs (early UIT rollovers). In approximately $389 million of these early UIT rollover transactions, some or all of the proceeds were used to purchase a subsequent series of the same UIT, often with the same or similar investment objectives and strategies as the prior series (early series to series rollovers)

The firm failed to detect that on thousands of occasions during the relevant period, its representatives recommended potentially unsuitable early series to series rollovers. Merrill Lynch failed to detect thousands of other occasions when its representatives repeatedly recommended other potentially unsuitable early UIT rollovers, even if not series to series, which caused customers to pay unnecessary sales charges. The FINRA AWC stated that, during the relevant period, a representative at Merrill Lynch recommended approximately 75 early UIT rollovers, the majority of which were held between 4.5 and 9 months, and the firm’s automated reports did not flag any of the rollovers.

Merrill Lynch Unit Investment Trusts – Early Rollovers and Sales Charges

Merrill Lynch’s 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 dates.

Contact Us – Merrill Lynch Early Rollover Unit Investment Trusts

Former and current Merrill Lynch with investment losses that exceed $250,000, and those who may have information relating to the manner in which the firm handled their accounts and UIT rollovers are encouraged to contact Lawrence L. Klayman, Esq., at (561) 542-5131, and download our Special Investor Report.

About KlaymanToskes

KlaymanToskes is a leading national securities law firm which practices exclusively in the field of securities arbitration and litigation, on behalf of retail and institutional investors throughout the world in large and complex securities matters. The firm represents high net-worth, ultra-high-net-worth, and institutional investors, such as non-profit organizations, unions, public and multi-employer pension funds. KlaymanToskes has office locations in California, Florida, New York and Puerto Rico.