FINRA recently disclosed that former Merrill Lynch broker Scott Ryland Mathews agreed to a Letter of Acceptance, Waiver and Consent (AWC), Case # 2018060359901, relating to engaging in an unsuitable pattern of 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.
As discussed on our recent blog post, FINRA also 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 UITs.
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 Broker Scott Ryland Mathews and Early Rollover of Unit Investment Trusts
According to the AWC, Between January 1, 2011 and December 31, 2015, Mathews recommended that his customers roll over UITs more than 100 days prior to their maturity on approximately 1,800 occasions. Although his customers’ UITs typically had a 15- or 24-month maturity period, Mathews recommended that they sell their UITs after holding them for, on average, only 262 days and use the proceeds to purchase a new UIT.
Of the approximately 1,800 early rollovers recommended by Mathews, approximately 330 were “series-to-series” rollovers. In other words, on approximately 330 occasions, Mathews recommended that his customers roll over a UIT before its maturity date in order to purchase a subsequent series of the same UIT, which, as noted above, generally had the same or similar investment objectives and strategies as the prior series.
Mathews’s recommendations caused his customers to incur unnecessary sales charges and were unsuitable in view of the frequency and cost of the transactions. Mathews consented to a three-month suspension from associating with any FINRA member in all capacities and a $5,000 fine.
Investment Losses with Merrill Lynch and Unit Investment Trusts – Contact Us
Former and current Merrill Lynch and/or Scott Ryland Mathews 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.
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.