Securities Arbitration Lawyer Blog
Iorio Altamirano LLP is investigating claims on behalf of Merrill Lynch, Pierce, Fenner & Smith Incorporated (“Merrill Lynch”) customers who invested in Unit Investment Trusts (UITs). If you have lost money with Merrill Lynch, contact New York securities arbitration lawyers Iorio Altamirano LLP for a free and confidential review of your legal rights.
On June 25, 2021, Merrill Lynch and the Financial Industry Regulatory Authority (“FINRA”) entered into a Letter of Acceptance, Waiver, and Consent No. 2017053437701 (“AWC”) over allegations that between January 2011 and December 2015, Merrill Lynch violated NASD and FINRA rules for failing to maintain an adequate supervisory system and written procedures to monitor Unit Investment Trusts transactions.
As part of the AWC, Merrill Lynch was censured and agreed to a fine of $3.75 million. Merrill Lynch also agreed to pay over $8.43 million in restitution to customers.
Merrill Lynch is a full-service broker-dealer with approximately 30,500 registered representatives and 4,200 branch offices. The firm is headquartered in New York, New York, and has been a FINRA member since 1937.
If you have lost money with Merrill Lynch, contact New York securities arbitration lawyer August Iorio of Iorio Altamirano LLP at august@ia-law.com or toll-free at (855) 430-4010.
What is a Unit Investment Trust (UIT)?
Unit Investment Trusts (UITs) sell investors shares or “units” in a fixed portfolio of securities through a one-time public offering. UITs are considered long-term investments that mature on a specific date, generally after 15 or 24 months. Once the UIT matures, the underlying securities are sold, and the proceeds are paid to investors.
A UIT’s portfolio is passively managed between the trust’s inception and its maturity date. UIT sponsors often offer UIT product lines in successive “series.” These new series coincide with the maturity date of the prior series. Successive series of UITs tend to have the same or similar investment objectives and investment strategies as the prior series, despite a change in the underlying securities that make up the fixed portfolio.
Investors can expect to pay various upfront sales charges and fees, including an initial sales charge (generally 1% of the purchase price), a deferred sales charge (generally up to 2.5% of the offering price), creation and development fee (C&D fee, generally .5% of the offering price), and a fee for annual operating expenses.
A broker recommending the sale of a customer’s UIT before its maturity date and who then uses the sale proceeds to purchase a new UIT would cause their customer to incur greater sales charges than if the customer held the UIT to maturity. As a result of their long-term nature, structure, and costs, short-term trading of UITs may be unsuitable.
FINRA AWC No. 2017053437701: Merrill Lynch Failed to Reasonably Supervise Trading of UITs
The AWC indicates that 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).
Further, FINRA alleged that Merrill Lynch failed to establish and maintain a supervisory system and to establish, maintain, and enforce written supervisory procedures (WSPs) reasonably designed to achieve compliance with FINRA’s suitability rule as it pertains to early rollovers of UITs. Specifically, FINRA alleged:
- During the relevant period, Merrill Lynch’s WSPs recognized that UlTs are “generally intended as long-term investments” and therefore provided that representatives, as a general matter, should not solicit short-term trading of UITs because of “sales practice concerns.”
- The WSPs also required “oversight” of short-term UIT transactions to “avoid unnecessary costs incurred to clients in fees and commissions.”
- Moreover, a document that a market surveillance and monitoring specialist circulated to Merrill Lynch’s surveillance team stated that 24-month UITs “should probably be held for at least 15 months” and that 15-month UITs should “probably be held for at least one year.”
- That same guidance also specified that representatives should not solicit early series to series rollovers.
- Nonetheless, Merrill Lynch did not establish a supervisory system that was reasonably designed to identify certain early UIT rollovers.
- The firm used automated reports that flagged UIT sales within 120 days of the end of the offering period, i.e., approximately seven months after the UIT was first issued, as well as representatives who, within the preceding month, executed three or more UIT sales within four months of purchase.
- But the firm did not have any report that identified when a representative recommended an early rollover of a UIT that had been held for more than seven months.
- Merrill Lynch also did not have any report that identified when representatives recommended patterns of early UIT rollovers after the initial seven-month period.
- As such, the firm failed to detect that on thousands of occasions during the relevant period, its representatives recommended potentially unsuitable early series to series rollovers.
- The firm 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.
- For example, 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.
As a result of Merrill Lynch’s supervisory failures, the early UIT rollovers may have caused customers to pay $8,437,223 in sales charges that they would not have incurred if they held the UITs until their maturity.
Merrill Lynch Brokers Kelly Feehrer and Scott Mathews Suspended
On June 25, 2021, FINRA also published two related AWCs. In the first AWC, FINRA and veteran Merrill Lynch broker Kelly Feehrer (CRD No. 1470328) agreed to a three-month suspension, after FINRA alleged that between January 1, 2011, and December 31, 2015, Mr. Feehrer engaged in an unsuitable pattern of short-term trading of Unit Investment Trusts (UITs) in customer accounts. Specifically, FINRA alleged:
- During the Relevant Period, Mr. Feehrer recommended that more than 200 of his customers roll over UITs more than 100 days prior to their maturity on nearly 3,000 occasions.
- Indeed, although his customers’ UITs typically had a 15- or 24-month maturity period, Mr. Feehrer recommended that his customers sell their UITs after holding them for, on average, only 215 days and use the proceeds to purchase a new UIT.
- Of the nearly 3,000 early rollovers recommended by Mr. Feehrer, approximately 190 were “series-to-series” rollovers. In other words, on approximately 190 occasions, Mr. Feehrer 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.
- As one example of a recommended “series-to-series” rollover, Mr. Feehrer recommended in December 2012 that a customer purchase a UIT that had an investment objective and strategy of “above-average total return through a combination of capital appreciation and dividend income.” Although that UIT had a two-year maturity period, Mr. Feehrer recommended that his customer sell it after only 241 days and use the proceeds to purchase a later series of the same UIT. The subsequent series of the UIT had the identical investment objective and strategy as the prior UIT. Mr. Feehrer’s recommendation that his customer rollover this UIT more than 440 days prior to its maturity caused his customer to incur increased sales charges to purchase what was, essentially, the same investment.
In addition to the three-month suspension, Mr. Feehrer, who has been a broker with Merrill Lynch in Chattanooga, TN, since 2004, consented to a fine of $5,000.
In the second AWC, former Merrill Lynch broker Scott R. Mathews (CRD No. 1314735) also consented to a three-month suspension after FINRA alleged that between January 1, 2011, and December 31, 2015, Mr. Mathews engaged in an unsuitable pattern of short-term trading of Unit Investment Trusts (UITs) in customer accounts. Specifically, FINRA alleged:
- During the relevant period, Mr. Mathews recommended that his customers roll over UITs more than 100 days prior to their maturity on approximately 1,800 occasions.
- Indeed, although his customers’ UIT typically had a 15- or 24- month maturity, Mr. 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, Mr. 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.
- As one example of a recommended “series-to-series” rollover, Mr. Mathews recommended in March 2014 that a customer purchase a UIT that had an investment strategy of seeking “current income and the potential for capital appreciation” and held a portfolio of “common shares of closed-end investment companies.” Although the UIT had a 15-month maturity period, Mr. Mathews recommended that his customer sell it after only 223 days and use the proceeds to purchase a later series of the same UIT. The subsequent series of the UIT had the identical investment strategy and objectives as the prior UIT. Mr. Matthews’s recommendation that his customer rollover this UIT more than 230 days prior to its maturity caused his customer to incur increased sales charges to purchase what was, essentially, the same investment.
In addition to the three-month suspension, Mr. Mathews, who was a financial advisor with Merrill Lynch in Charlotte, NC, from 2009 until 2020, consented to a fine of $5,000. Mr. Mathews is no longer registered with FINRA or associated with any brokerage firm.
How to Recover Losses or Obtain a Free Consultation
A FINRA restitution order does not preclude investors from pursuing their own claims to seek restitution or other available remedies. Investors harmed by Merrill Lynch’s failures may have a claim against the firm.
If you have lost money with Merrill Lynch, contact New York securities arbitration lawyer August Iorio of Iorio Altamirano LLP at august@ia-law.com or toll-free at (855) 430-4010 for a free and confidential consultation.
Iorio Altamirano LLP is a securities arbitration law firm based in New York, NY. We pursue FINRA arbitration claims nationwide on behalf of investors to recover financial losses arising out of wrongful conduct by financial advisors and brokerage firms.