Investor Lawyers Blog
On August 14, 2018, the Enforcement Section of the Massachusetts Securities Division (the “Division”) filed a Complaint against StockCross Financial Services, Inc. (“StockCross”) (CRD# 6670), as well as one of its registered representatives, Mr. Peter E. Cunningham (“Cunningham”) (CRD# 2400211). Through its administrative action, the Division has alleged that Cunningham engaged in “[i]mproper buys and sells of an investment known as a unit investment trust (“UIT”) throughout Cunningham’s Massachusetts client accounts.” The Division also alleges that StockCross failed to properly supervise Cunningham, and even promoted him, despite its awareness of Mr. Cunningham’s previous checkered regulatory history — including six customer complaints resulting in approx. $330,000 in settlement payments to investors.
A UIT is a type of security that shares some similarities to mutual funds and closed-end funds (CEFs), insofar as a UIT consists of a basket of different investments. Historically, most UITs were structured as vehicles in which to purchase a basket of municipal bonds. Over time, UITs have evolved to the point where today, retail investors might invest in a variety of UITs offering exposure to various asset classes and economic sectors. However, unlike traditional mutual funds or CEFs, UITs are structured with a finite lifespan, and thus cease upon a given predetermined date. Additionally, UITs generally charge investors high fees, as high as 3-5% of the initial investment. Unfortunately, as a result of their fee structure, some brokers and investment advisers will encourage their clients to actively trade in and out of UITs, a practice commonly referred to as “switching” and akin to churning an investment portfolio, in an effort to generate excessive commissions for the benefit of the broker, and to the detriment of the uninformed investor. Switching transactions that appear to be fee-motivated may give rise to investor claims against advisors.
As alleged by the Division, since as early as 2012, “[C]unningham has engaged in short-term UIT trading in the accounts of his Massachusetts clients. Of [his] approximate 180 clients, nearly 60, or approximately 30%, are Massachusetts residents. Statements from [his] Massachusetts client accounts reflect sales of UITs as soon as 26 days after purchase and sometimes years before the UIT is predetermined to reach its maturity date. Cunningham often used proceeds of the sales to buy other UITs.”
On September 25, 2017, the Financial Industry Regulatory Authority (“FINRA”) issued a fine of $3.25 million against Morgan Stanley Smith Barney LLC (“Morgan Stanley”) in connection with the brokerage firm’s alleged failure to supervise its brokers’ short-term trades of unit investment trusts. Unit investment trusts (“UITs”) are a specific type of Investment Company, as defined by the Investment Company Act of 1940 (the ’40 Act), and subject to regulation by the SEC. Unlike mutual funds, closed-end funds, or ETFs, UITs are unique in that they are created for a specific, limited time period (e.g., 24 months). Furthermore, UITs consist of a static investment portfolio as part of a pre-selected pooled investment vehicle.