Complex Financial Products

Complex financial products continue to make stock brokers rich while only sometimes satisfying the needs of individual investors. Many of these products are so complex that the financial advisors who are selling them do not fully understand how they work. However, federal security law mandates that investment strategies and individual investments must demonstrate an ongoing suitability match between investment and investor.

Characteristics of Unit Investment Trusts or UITs

According to the Securities and Exchange Commission (SEC), a Unit Investment Trust or UIT can be distinguished through several key characteristics:

  • Like a mutual fund, a UIT typically issues redeemable securities (or "units") and will buy back an investor’s "units," at the investor’s request, at their approximate net asset value (or NAV) .
  • A UIT typically will make a one-time "public offering" of only a specific, fixed number of units (like closed-end funds). Many UIT sponsors, however, will maintain a secondary market, which allows owners of UIT units to sell them back to the sponsors and allows other investors to buy UIT units from the sponsors.
  • A UIT will have a termination date that is established when the UIT is created.
  • A UIT does not actively trade its investment portfolio. Rather, a UIT buys a relatively fixed portfolio of securities and holds them with little or no change for the life of the UIT.
  • A UIT does not have a board of directors, corporate officers, or an investment adviser to render advice during the life of the trust.

Problems with Unit Investment Trusts or UITs

Early Rollovers or Exchanges

Photo by {artist}/{collectionName} / Getty Images
Photo by {artist}/{collectionName} / Getty Images

According to securities industry watchdog FINRA’s recent report on UITs, the vast majority of UITs purchased are not traded or redeemed significantly in advance of maturity without a customer-specific need for liquidation or specific changes in the economic environment. Given that registered representatives earn most of the fees associated with UITs at or shortly following the initial offering period, there is a risk that they may recommend early rollovers or exchanges to increase their sales credits.

FINRA identified instances in which customers were advised to roll their UIT investments over early, and firms did not have appropriate supervisory mechanisms in place to identify and review the suitability of the recommendation. This practice causes investors to incur additional sales charges, including both creation and development fees and deferred sales charges.

Short-Term UIT Trading Abuse

Some firms FINRA reviewed failed to adequately identify short-term UIT trading activity as an area of potential abuse by registered representatives, and did not implement adequate internal controls to identify potentially problematic UIT trading activity.

FINRA Securities Litigation Law Firm

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If you or someone you know has been the victim of securities fraud or broker misconduct, please contact our the securities attorneys at Green & Schafle  immediately for a free consultation to protect your legal rights by calling 215 462 3330 or by using our online contact form.

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