FINRA Imposes $13 Million Sanction for Failure to Supervise UIT Sales

September 29, 2017

On September 25, 2017, the Financial Industry Regulatory Authority (“FINRA”) announced that it had fined Morgan Stanley Smith Barney LLC (“Morgan Stanley”) $3.25 million and required the firm to pay approximately $9.78 million in restitution to more than 3,000 customers for failing to supervise short-term trades of unit investment trusts (“UITs”)1. In settling this matter with FINRA, Morgan Stanley consented to the entry of FINRA’s findings and neither admitted nor denied the charges.

FINRA’s Findings

FINRA found that between January 2012 and June 2015, hundreds of Morgan Stanley representatives rolled over UITs prior to the maturity date in thousands of customer accounts. Specifically, FINRA determined that Morgan Stanley failed to: (i) adequately supervise representatives’ sales of UITs by providing insufficient guidance to supervisors regarding how they should review UIT transactions to detect unsuitable short-term trading; (ii) provide supervisory review of rollovers prior to execution within Morgan Stanley’s order entry system; (iii) conduct UIT-specific training for representatives.

Credit for Cooperation Efforts?

In assessing sanctions, FINRA noted Morgan Stanley’s cooperative efforts, which included: (a) initiating a firm wide investigation, including interviewing more than 65 personnel and the retention of an outside consultant to consult a statistical analysis of UIT rollovers; (b) identifying affected customers and establishing a plan to provide those customers with remediation; and, (c) providing substantial assistance to FINRA in its investigation.

The FINRA Sanction Guidelines recognize that certain proactive, corrective measures may have an impact on sanction determinations. Guidance for such cooperation credit is available at Regulatory Notice 08-70. While FINRA noted Morgan Stanley’s cooperation efforts, the extent of “credit” (i.e., reduction of charges or diminution in sanctions) provided in setting the sanctions in this matter is unclear.

Going Forward

The industry should expect heightened scrutiny in examinations and enforcement. This matter appears to have led FINRA to launch a targeted investigation of UIT rollovers in September 2016. Additionally, FINRA’s 2017 Exam Priorities Letter highlighted that FINRA will continue to evaluate firms’ ability to monitor for short-term trading of long-term products.

In light of FINRA’s heightened scrutiny in this area, firms should make every effort to supervise representatives’ UIT transactions, including developing a plan for how firms can detect unsuitable short-term trading prior to execution. Further, firms should conduct UIT-specific training for all representatives. Firms may also consider implementing a review protocol within order entry systems to confirm that suitability is proper prior to executing any short-term UIT rollovers.


1 A UIT is an investment company that offers units in a fixed portfolio as redeemable to investors for a specific period of time. Often, the redeemable unit’s maturity date occurs after 15 or 24 months. UITs impose a number of charges that can total approximately 3.95% for a 24-month UIT. A registered representative’s repeated recommendations that a customer sell his or her UIT before the maturity date and then “roll over” the funds into a new UIT incurs increased sale charges for the customer, which raises suitability issues.