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Wells Fargo Unit Investment Trust Failure to Supervise Early Rollovers, Settles with FINRA

January 7, 2022

National investment fraud lawyers KlaymanToskes is investigating Wells Fargo in light of FINRA’s recent disciplinary action against the firm relating to its short-term sales of Wells Fargo Unit Investment Trust (“UIT”). According to FINRA, from July 2013 through June 2018, Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC (“Wells Fargo”) failed 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, which caused investment losses across thousands of customers’ accounts.

What is a Unit Investment Trust?

According to FINRA, a Unit Investment Trust is a form of investment company that offers investors shares, or “units,” in a fixed portfolio of securities in a one-time public offering that terminates on a specified maturity date, often after 15 or 24 months. 

UITs are generally intended as long-term investments and have sales charges based on their long-term nature, including deferred sales charges, and a creation and development fee. 

Risks of Unit Investment Trusts

A registered representative who recommends that a customer sell his or her UIT position before the maturity date and then “roll over” those funds into a new UIT causes the customer to incur greater sales charges than if the customer had held the UIT until maturity, raising suitability concerns and resulting in investor losses.

For instance, a customer who purchases a 24-month UIT and holds it until maturity would have paid a sales charge of about 3.95%. However, if after six months, the customer rolled over the UIT into a new UIT, he or she would have paid an additional 2.95% in sales charges. And, if the customer repeatedly rolled over the existing UIT into a new UIT every six months, he or she would have paid total sales charges of approximately 12.8% over a two-year period.

What Happens at a UIT’s Maturity?

According to FINRA’s Investor Insight, if you hold a UIT until its termination date, you’ll have a few options. You can typically:

  • Do nothing. When a UIT matures, it will liquidate its portfolio and divvy up the proceeds — if any — to investors.
  • Rollover the investment. Alternatively, investors may be able to have the value of that cash payout rolled over into a new series of the same UIT or another UIT by the same sponsor. 
  • In-kind distribution. If you really want to continue with the same investment even after a trust terminates, you may under certain circumstances be able to request that the UIT sponsor pay out your portion of the trust in the form of stock in the underlying investments.

Wells Fargo’s Breach of Fiduciary Duty in the Supervision of Short-Term UIT Trading

According to a FINRA Letter of Acceptance, Waiver and Consent, Wells Fargo did not establish a supervisory system that was reasonably designed to identify early UIT rollovers. For instance, Between July 1, 2013, and June 30, 2018, the following occurred:

  • Wells Fargo executed approximately $27 billion in UIT transactions across more than 123,000 accounts. 
  • The $15.6 billion in UIT purchases included approximately $1.8 billion in purchases 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 $213.2 million of these early UIT rollover transactions, some or all of the proceeds were used to purchase a subsequent series of the same UIT.

Unfortunately, Wells Fargo’s automated report that flags these type of occurrences did not account for the length of time a UIT was held before it was sold. As a result, Wells Fargo did not have any automated system to identify when UITs were rolled over significantly in advance of their maturity date.

What is a Letter of Acceptance, Waiver and Consent?

If FINRA’s Department of Enforcement has reason to believe a violation has occurred and the FINRA member does not dispute the violation, FINRA’s Department of Enforcement may prepare and request that the member:

  • execute a letter accepting a finding of violation
  • consent to the imposition of sanctions, and
  • agree to waive such member’s or associated person’s right to a hearing before a Hearing Panel or, if applicable, an Extended Hearing Panel, and any right of appeal to the National Adjudicatory Council, the SEC, and the courts, or to otherwise challenge the validity of the letter, if the letter is accepted. 

The letter shall describe the act or practice engaged in or omitted, the rule, regulation, or statutory provision violated, and the sanction or sanctions to be imposed. 

Unless the letter states otherwise, the effective date of any sanction(s) imposed will be a date to be determined by FINRA staff.

Wells Fargo Among Six Firms Reaching Settlement with FINRA on UIT Early Rollovers

FINRA initiated a targeted examination of early UIT rollovers after finding a member firm failed to reasonably supervise early UIT rollovers in thousands of customers’ accounts, per a December 2021 press release. Wells Fargo’s settlement for mismanagement of funds with FINRA is one of several settlements relating to this issue of fiduciary negligence.

Wells Fargo UIT Investment Loss Recovery for Wells Fargo Unit Investment Trust Short-Term Trading

Former and current customers of Wells Fargo whose incurred losses due to early Unit Investment Trust rollovers, and those who have information relating to the sales practices of Wells Fargo and Unit Investment Trusts, are encouraged to contact Lawrence L. Klayman, Esq. at (561) 542-5131, and download our Special Investor Report. 

About Us

KlaymanToskes is a leading national securities law firm specializing in Wells Fargo Unit Investment Trust loss recovery, which practices exclusively in the field of securities arbitration on behalf of retail and institutional investors throughout the world in large and complex securities matters. KlaymanToskes has recovered more than $225 million for investors in FINRA arbitrations. KlaymanToskes has office locations in California, Florida, New York, and Puerto Rico.

Contact

KlaymanToskes
Lawrence L. Klayman, Esq.
(561) 542-5131
lklayman@klaymantoskes.com
www.klaymantoskes.com