Another Morgan Stanley Broker Hit for Churning Unit Investment Trusts
Regulators continue to ding broker-dealers for failing to supervise financial advisors trading Unit Investment Trusts. The latest FINRA disciplinary action concerning UITs comes against Thomas F. Niles of Saratoga Springs, NY, who has been suspended for three months and fined $5,000 for allegedly "churning” UITs in client accounts. Niles, a broker of 25 years experience, was censured for an alleged “unsuitable pattern of short-term trading” in 148 accounts over two and a half years while working at Morgan Stanley, according to the FINRA enforcement website.
What is a Unit Investment Trust?
Unit Investment Trusts, or UITs, share a category with mutual funds and closed-end funds. These investments are investment companies which pool money from many investors in order to invest in specific goals. The primary difference between a UITs and the other more familiar types of investments is that, once a UITs establishes its portfolio, it remains that way for the life of the investment — and the term is fixed.
How Do UITs Work?
UITs raise funds by selling shares to investors. These shares are called “units,” and they are typically offered one-time only to the public. Each unit represents a piece of ownership in the trust and gives the owner a proportional right to income and capital gains generated by the fund in the form of stocks and bonds.
UITs are designed to be held for the life of the fund, but many UITs are publicly traded, which might offer investors an opportunity to sell their shares early should their investment goals change.
At the end of the maturity period of a Unit Investment Trust, you and your financial advisor may decide to rollover the investment into a new UIT. While this is a perfectly legitimate transaction, it also opens up the opportunity for an unscrupulous broker to rollover the investment more than once — perhaps many times.
When this excessive rolling-over of a UITs is done to gain a financial advisor illegitimate fees, it’s called churning. Churning is considered a form of misconduct and may open a financial advisor up to regulatory action, fines, and disbarment from FINRA.