The Financial Industry Regulatory Authority penalized American Portfolios Financial Services, Inc. over failures in supervision of unit investment trusts (UITs)
FINRA said in a news release that the firm failed to reasonably supervise recommendations that customers sell UITs before their maturity dates, which resulted in the customers paying unnecessary costs and fees. American Portfolios was fined $400,000 and ordered to pay $1,232,939 in restitution, plus interest to customers who were affected.
FINRA explained that UITs are investment products that hold a fixed portfolio of securities and terminate on a specified maturity date, often after 15 or 24 months. They are generally intended to be held to maturity, which is reflected in the structure of sales charges. If a representative recommends that a customer sell a UIT before maturity and purchase a new one with the proceeds, it results in sales charges that would not be incurred when holding the UIT to maturity.
“Protecting investors and ensuring market integrity is central to FINRA’s mission, and this action will return more than $1.2 million to customers who paid unnecessary costs,” said FINRA’s Executive Vice President and Head of Enforcement, Bill St. Louis. “Member firms have a clear obligation to supervise their representatives’ product recommendations, including identifying patterns that appear to cause customers to incur unnecessary costs.”
The matter covers the period from January 2018 to October 2024, when American Portfolios became part of OsaicWealth, Inc. American Portfolios customers purchased approximately $470 million in UITs during that time.
It was alleged that American Portfolios failed to implement a system, including written policies and procedures, that was reasonably designed to supervise UIT recommendations for compliance with FINRA Rule 2111. (Suitability) and Regulation Best Interest’s Care Obligation.
According to FINRA, American Portfolios’ supervisory system was not designed to identify representatives who repeatedly recommended that their customers sell UITs before maturity.
Two of the representatives recommended customers sell UITs before maturity about 61% of the time. On average, these customers held their UIT investments for just half of their term lengths. The two representatives also generally recommended that their customers use the proceeds from these early sales to purchase new UITs with additional sales charges.
Another representative recommended customers sell their UITs prior to maturity 78% of the time, and the customers held their investments on average for just over half of the UITs’ term lengths. The three representatives caused 295 investors to pay $1,232,939 in unnecessary costs and fees, money which will now be returned to the customers.
American Portfolios did not admit or deny the charges but consented to the entry of FINRA’s findings..
FINRA said the case is part of its emphasis on how member firms supervise UIT recommendations, including early sales and subsequent purchases that caused customers to incur excess sales charges. FINRA reached settlements with six member firms after a 2016 sweep focused on this area, and more than $16.8 million in restitution was returned to approximately 10,000 investors.
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