FINRA Fines American Portfolios $1.6M, Alleging UIT Lapses

FINRA Fines American Portfolios $1.6M, Alleging UIT Lapses According to FINRA, three reps repeatedly recommended that clients sell unit investment trusts early and buy new ones, thereby racking up unnecessary fees for customers. American Portfolios Financial Services will pay about $1.6 million to settle FINRA charges alleging it failed to oversee registered reps whose recommendations caused clients to incur unnecessary costs and fees. According to FINRA, American Portfolios’ policies and procedures weren’t designed to catch red flags of reps working with unit investment trusts, investment products with a fixed portfolio of securities that are typically set to mature after 15 to 24 months. “Member firms have a clear obligation to supervise their representatives’ product recommendations, including identifying patterns that appear to cause customers to incur unnecessary costs,” FINRA Enforcement Head Bill St. Louis said about the settlement According to the order, the time period in question occurred from 2018 through October 2024. The firm was one of eight broker/dealers under the Advisor Group, which rebranded to Osaic and rolled its eight b/ds into one entity over the course of several years. UITs offer a one-time public offering and are typically not actively managed, and impose several upfront charges. While they can be beneficial for investors, those who sell before the maturity date will lose part of the benefit, may not have enough to recoup the costs of the upfront charges, and can be more in the hole if the rep acting on behalf of the client uses the sales proceeds to purchase a new UIT, with more upfront charges. During the time in question, American Portfolios reps bought about $470 million in UITs. Still, FINRA claims its supervisory systems were not up to par, running afoul of FINRA rules and the Securities and Exchange Commission’s Regulation Best Interest. The firm’s policies required supervisors to assess whether UIT recommendations were suitable, but didn’t detail how to conduct such an analysis, according to FINRA. Starting in October 2018, the firm instituted trade alerts that escalated UIT sales and purchases above $1,000 for supervisory review, but the alerts didn’t specify how long the UITs had to maturity, among other necessary information. “Therefore, reviewers had no basis to identify red flags associated with representatives who repeatedly recommended that their customers sell UITs early in order to purchase new UITs, even though they may have caused customers to pay unnecessary sales charges,” the order read. In particular, FINRA cited three reps who regularly recommended that clients sell UITs before their maturity dates. A pair of reps working as a team recommended that customers sell purchased UITs before maturity about 61% of the time, with clients typically holding UITs for only half of the term. The duo also typically recommended using the proceeds to buy new UITs with additional charges, resulting in 139 customers paying at least $872,960 in costs and fees. A third rep recommended clients buy about $15 million in UITs and sell them before maturity, about 78% of the time (those clients typically held the UITs for about 56% of the term lengths). Like the duo of reps, this unnamed advisor recommended using the proceeds of the UIT sales to purchase new UITs (with upfront charges). After the 2024 merger, Osaic began using its system to supervise American Portfolios accounts. In a statement, an Osaic spokesperson said the firm had agreed with FINRA to resolve the matter that occurred before Osaic’s integration. “Osaic Wealth’s supervisory policies and procedures were not the subject of this investigation,” the spokesperson said. “We are glad to put this matter behind us.” American Portfolios did not confirm or deny the findings, but in addition to over $1.23 million in restitution plus interest, the firm will pay a $400,000 fine. FINRA has long focused on UIT recommendations, including a 2016 focused sweep that led to six settlements against firms, including Oppenheimer & Co., Stifel, Citigroup, Merrill Lynch, Wells Fargo and SagePoint. The agency fined Morgan Stanley $13 million for supervisory lapses in UIT sales, and in 2019, the SEC fined Raymond James $15 million for similar issues. In 2023, FINRA fined Centaurus Financial for failing to supervise a rep’s recommendations related to UIT products.