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Securities Lawyer Jonathan Kurta
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Unit Investment Trust Fraud: How UITs Can Result in Significant Losses for Investors

Unit Investment Trusts (UITs) offer investors the opportunity to pool their investments in a portfolio of stocks and bonds. Unlike a mutual fund, unit investment trust investments are not actively managed. Once a UIT chooses its securities, it remains locked in those investments until the UIT reaches maturity. When the expiration date arrives, investors receive their interest minus any fees. UITs offer their shares in an initial round of offerings and come with relatively low minimum investments. While they may sound like relatively straightforward investments, investors should still be aware of the potential for unit investment trust fraud.

Unit Investment Trust Definition 

Unit Investment Trusts are investment companies. These investment vehicles come in two basic forms: Stock UITs and bond UITs. Bond UITs are lower risk, but stock UITs come with the opportunity to earn a dividend. Shares of a UIT are also called “units.”

Payment Structure for UITs

Investors have several options when their investments reach their maturity date: 

  • Once the UIT reaches maturity, the investor will receive their principal payment back plus any interest. 
  • If investors want to stick with the same investment strategy, they may ask to receive the UIT’s underlying shares instead of interest. 

If investors want to redeem their shares before the maturity date, they can redeem them with the issuer. The shares may have declined in value, which would result in a loss for the investor. 

What is a UIT Rollover? 

Shares of UITs are often offered as a “series.” Investors may take funds generated by a UIT and invest them in a new UIT. This is called a “series-to-series rollover.” Often, the new UIT series will have a similar objective and strategy. In this case, the issuer may offer a sales charge discount. 

Rollovers can generate significant commissions for brokers and present the most opportunity for unit investment trust fraud, particularly when the rollovers take place before the UIT’s maturity date. 

Unit Investment Trust Fees 

Because of these charges, UITs are not suitable for short-term trading—whenever an investor rolls over their UIT before its maturity date, they risk incurring unnecessary fees. 

UIT Rollovers and Investment Fraud 

FINRA ordered Merrill Lynch to pay $8.4 million in restitution to 3,000 investors for supervisory failures involving Unit Investment Trusts. The investors had supposedly incurred unnecessary sales charges involving early UIT rollovers. FINRA alleged that Merrill Lynch’s supervisory system was not adequately designed to catch these large numbers of early UIT rollovers. Jessica Hopper, the Head of FINRA’s Department of Enforcement, released the following statement: “Customers often incur unnecessary costs when representatives recommend short-term sales of products that are intended as long-term investments. FINRA member firms must implement supervisory systems sufficient to identify these potentially unsuitable transactions. Providing restitution to harmed investors remains a top priority for FINRA.”

Regulators have also fined individual brokers: 

  1. On July 1, 2021, FINRA fined a broker $10,000 for misconduct involving UITs. FINRA alleged that the broker recommended to several investors to redeem their UITs before maturity and then used the proceeds to roll over into a new UIT. The new UITs, according to FINRA, had approximately the same strategies and investment goals as the previous UITs. Investors allegedly paid new sales charges and received what was essentially the same investment. These transactions did not work in the investors’ best interests and did not uphold FINRA Rule 2111. FINRA Rule 2111 requires that brokers only recommend investments that suit their investor’s financial goals. 
  2. State regulators have also intervened on investors’ behalf in light of improper UIT trading. California ordered a broker to pay restitution of $100,000 following allegations he had engaged in short-term trading with UIT investments. The State also ordered the broker to take 40 hours of securities industry education courses. 

Unit Investment Trust Risks

Investors who buy UITs should make sure they know the following risks. 

  1. Illiquidity: UITs are usually meant to be held for 15 to 24 months. Brokers should only recommend UITs to investors who can afford to keep their money invested until maturity. 
  2. Risky investments. Most UITs focus on stocks and bonds, but these underlying investments can vary in their degree of risk. Brokers should accurately describe the risks associated with a particular UIT. FINRA reminds investors that there are no guarantees that their UIT will perform as expected. 
  3. Big commissions. Investors in UITs are vulnerable to stockbroker fraud due to the large broker commissions associated with these types of investments. FINRA reported in their 2018 Annual Regulatory and Examination Priorities Letter that brokerage firms had struggled to implement effective controls. FINRA did not offer an explanation for this struggle. 
  4. Fees and sales charges. The UIT manager takes fees out of any interest generated. Brokers should accurately communicate any fees associated with a UIT, including any sales charges. 
  5. No public exchange. UITs are not meant to be bought and sold on a public exchange. Some sponsors, however, will provide a secondary market.
  6. Long maturity dates. UITs typically mature in two years or less, but that is not a hard-and-fast rule. A unit investment trust could take years to mature, especially if it is a bond UIT. Brokers should be clear about a UIT’s maturity date. 

Contact a Unit Investment Trust Fraud Lawyer

Unnecessary UIT sales charges can lead to significant losses. You should not lose money simply so your broker can enjoy a bigger commission. If you believe your broker recommended a UIT rollover that did not work in your best interest, do not hesitate to contact the securities lawyers of Kurta Law. 


Securities Lawyer Jonathan Kurta
Written by: Jonathan Kurta

Jonathan Kurta is an accomplished securities attorney and a founding partner at Kurta Law.