Another Ex-Morgan Stanley Broker Sanctioned over UIT Sales
(Corrects headline to indicate broker no longer works at Morgan Stanley.)
The fallout from the Financial Industry Regulatory Authority’s sweep of unit investment trust sales continues as a former Morgan Stanley broker on Thursday agreed to a fine and suspension for allegedly unsuitable UIT trading.
Ron Ray Willoughby, a 25-year industry veteran, agreed to a $5,000 fine and three-month suspension to settle the regulator’s allegation that he recommended 900 short-term UIT rollovers between July 2012 and December 2014, according to a letter of settlement published by Finra.
UITs are not designed as trading investments, and Willoughby exacerbated his unsuitable recommendations by encouraging customers to sell their 15-to-24 month UITs more than 100 days prior to maturity and use the proceeds to purchase new instruments with almost identical characteristics.
“Willoughby’s recommendations caused his customers to incur unnecessary sales charges, and were unsuitable in view of the frequency and cost of the transactions,” Finra wrote.
Willoughby, who agreed to the order without admitting or denying the findings, is now an independent broker with Kestra Investment Services in Tempe, Arizona.
In an interview, he said that he used spreadsheets provided by Morgan Stanley to determine his timing recommendations, based some recommendations on clients’ desire for tax-related losses, and helped clients achieve many of their investment goals with the fixed-income instruments.
“My customers loved them,” he said. “They beat the S&P 500 every single time.”
Willoughby, who said he is about to retire, now conducts an almost entirely fee-based business, but acknowledges that at one point in his career he was managing about $50 million of UIT positions for clients, with average positions of around $50,000. He said the products included Morgan Stanley’s Van Kampen Investments funds and a First Trust Deep Value Dividend ETF.
Finra regulators, he added, didn’t care that many trades were unsolicited and profitable for customers, or weigh market conditions that motivated the traded. “They aso didn’t care if Morgan Stanley said this is roll-eligible and you rolled it over off Morgan Stanley’s spreadsheet. None of that mattered.”
In its discussion of the settlement, Finra focused on the high commission costs that customers can incur.
A hypothetical investor who purchases a 24-month UIT and holds it to maturity would pay a sales charge of about 3.95%. Rolling over to a new UIT after six months would cost an additional 2.95%.
“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,” the letter of acceptance, waiver and consent said.
Willoughby has three client complaints on his BrokerCheck record, two of which involve UIT sales. One that sought unspecified damages settled for $33,035 in October 2017, and another from 2008 asked for $249,000 and settled for $87,500.
A spokeswoman for Morgan Stanley declined to comment on the settlement and did not immediately return a request for comment on Willoughby’s remarks.
The wirehouse in September 2017 paid a $3.25 million fine to Finra to settle allegations of failing to adequately supervise short-term sale of UITs by hundreds of brokers from 2010 through mid-2014.It also repaid $10 million to customers and agreed to conduct an internal sweep for sales violations.
In the past two years, a number of former Morgan Stanley brokers have faced months-long suspensions and fines over their sales of the products, and at least two others stopped selling the products altogether because of the potential regulatory headaches.