Finra Orders New Jersey Firm to Pay $470K for UIT Violations
The Financial Industry Regulatory Authority has censured Parsippany, New Jersey broker-dealer Hennion & Walsh Inc. and ordered it to pay a $165,000 fine and return $305,438 to customers for failing to supervise brokers who promoted short-term exchanges of the firm’s proprietary unit investment trusts.
The sanctions, disclosed in an acceptance, waiver and consent letter Finra published on Wednesday, is the latest in a series imposed on large and small firms since the regulator began targeted exams aimed at unsuitable “early rollover” recommendations of UITs.
Between December 2011 and December 2016, Hennion supervisors failed to follow up on compliance alerts regarding 29 brokers who recommended 645 early exchanges within the same UIT “series” without a “reasonable basis” for the recommendations. The switches on the proprietary products, which had a maximum sales charge of 3.95% and had virtually identical investment characteristics, affected 438 accounts and cost customers the more than $305,000 of unnecessary sales charges.
Hennion, an almost 30-year old firm that employs 131 brokers specializing in municipal bond sales, accepted the sanctions without admitting or denying the findings, according to the letter of acceptance, waiver and consent that Finra posted. Richard Hennion, co-founder of the firm, did not return a call for comment.
The firm “failed to establish and maintain a supervisory system, including written supervisory procedures, reasonably designed to detect and prevent unsuitable series-to-series UIT switching,” the consent letter said.
Finra has focused on UIT sales violations for several years. It did not identify the product in its 2019 risk monitoring and exam priorities letter released this week that focused on new areas such as online product sales and bond mark-up disclosure, but noted that product suitability “as always” remains a priority.
“[R]ecommendations to purchase share classes that are not in line with the customer’s investment time horizon or hold for a period that is inconsistent with the security’s performance characteristics (which could include, for example, a recommendation to purchase and hold a security that is intended for short-term trading or to engage in short-term trading in products designed primarily for long-term holding),” it noted. Raymond James Financial in October is believed to have terminated as many as half a dozen advisors over allegations of unsuitable Unit Investment Trust sales, and several Morgan Stanley brokers have faced fines and suspensions over short-term UIT trading recommendations.