Morgan Stanley to Pay $13 Million for UIT Sales Violations

Ramin Talaie/Getty Images News

The Financial Industry Regulatory Authority on Monday fined Morgan Stanley Wealth Management $3.25 million and ordered it to restore almost $10 million to customers over allegedly unsuitable sales of unit investment trusts.

The investigation of UIT sales practices at the biggest U.S. brokerage firm, as measured by its almost 16,000 brokers, was also responsible for the launch of a broad “sweep” investigation of how firms industry-wide market the packaged investment product, Finra said.

From January 2012 to June 2015, Morgan Stanley failed to properly supervise sales by “hundreds” of brokers who recommended sale of UITs well before the instruments were scheduled to mature and purchase of new shares of the product, the regulator’s enforcement division said in a settlement letter accepted by the firm.

UITS are designed as relatively long-term holdings with maturities of 15 to 24 months, but Morgan Stanley brokers pushed redemptions into new purchases in 3,020 customer accounts more than three months early. Brokers typically collect commissions of 4% on UIT sales, according to the regulator.

“[I]f 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,” Finra wrote.

The broker-dealer, which neither admitted nor denied the allegations, initiated an investigation to identify the scope of potentially unsuitable UIT sales “prior to intervention by a regulator,” Finra said in the acceptance, waiver and consent document posted on its enforcement website. Morgan Stanley interviewed more than 65 people and retained an outside consultant to conduct a statistical analysis, Finra said.

“The firm is pleased to have resolved this matter and to have been recognized by FINRA for its extensive cooperation,” said a Morgan Stanley spokeswoman.

In the three-and-a-half year sales period that the regulator studied, about 16% of the $33.4 billion of UITs traded at the firm, or more than $5.2 billion, involved “early rollovers” more than 100 days before maturity, Finra said.

In August, Finra suspended former Morgan Stanley broker Elaine LaCerte in Colorado for six months for recommending sales of over 100 UIT products before their maturity dates.

Finra said Morgan Stanley failed to supervise its brokers on several fronts, including giving them “no training” specific to UITs. It also gave “insufficient guidance” to supervisors about how to monitor sales of the products, according to the settlement notice.

From a systems perspective, Morgan Stanley specifically excluded UIT rollovers from an automated compliance alert system that would have required additional approval when a UIT was purchased within 60 days of the sale of an open-end mutual fund or UIT.

“Firms must adequately supervise representatives’ sales of UITs –including providing sufficient training –and have in place a system to detect potentially unsuitable short-term UIT rollovers,” Finra’s enforcement head Susan Schroeder said in a prepared statement.

The regulator began a sweep of UIT sales and supervision practices in September 2016, and has made supervision of the instruments and other investments designed for long-term holding a 2017 exam priority.