Unit Investment Trusts

The Securities and Exchange Commission (“SEC”) regulates various investment companies (“Investment Companies”). Under federal securities law, Investment Companies are categorized into three (3) basic types:

• Mutual funds;
• Closed-end funds;
• Unit Investment Trusts.

Investment Companies, including Unit Investment Trusts (“UITs”) are primarily regulated under the Investment Company Act of 1940 (the “Act”) and the rules and regulations set forth under the Act.

Unlike a mutual fund or closed-end fund, a UIT is created for a specific, limited duration of time, and moreover, consists of a static investment portfolio. As a professionally selected pooled investment vehicle, a UIT consists of a portfolio of securities selected by a sponsor and deposited into the trust for a predetermined time frame. A UIT is registered with the SEC as either a Registered Investment Company (“RIC”) or a Grantor Trust.

Just as today’s investor can pick from any number of mutual funds or closed-end offerings based on type of security and other factors, UITs also come in many different varieties.

In general, investors may choose from equity (stock) UITs or fixed-income (bond) UITs (historically, the majority of UIT assets have been invested in fixed-income investments, particularly municipal bonds).

Within each of these two broad categories, various types of UITs are available based on a number of factors including risk level and investment strategy. For example:

Equity UITs:

• Asset Allocation UIT – invests in a basket of stocks based upon asset class, style and market capitalization (e.g., a UIT designed to focus on U.S. small-cap and mid-cap growth companies);

• Sector Specific UIT – invests in selected securities within a specific sector (e.g., healthcare, utilities, technology);

• Equity Income UIT – invests in stocks that pay dividends and may also provide some capital appreciation.

Fixed-Income UITs:

• Tax-Free Fixed Income: invests in a pool of bonds that provide income on a monthly or semiannual basis that is exempt from federal and, in some instances, state taxation;

• Taxable Fixed Income: invests in a pool of taxable bonds that might include various corporate or agency issues that provide income.

As described above, UITs share many similarities to both mutual funds and closed-end funds, including the potential for the investor to achieve his or her diversification needs by investing in a basket or portfolio of various securities.

However, UITs are unique in the following respects:

• Passive Management & Static Portfolio: unlike mutual funds or closed-end funds that are actively managed, UITs consist of a fixed, static portfolio of securities selected by the sponsor and not subject to change (unless certain circumstances arise, including severe credit change in one of the UIT investments, or the UIT itself filing for bankruptcy);

• Specified Termination Date: a UIT is designed to invest in a fixed portfolio of securities for a specific, predetermined time frame (e.g., with many fixed-income UITs, the Trust may expire after 20 or 30 years) -- once the time frame is exhausted, the UIT dissolves and investors are typically presented with the following options:

  • Rollover – the investment into a new series of the same UIT, or another UIT altogether;
  • Mature – and liquidate the underlying units and receive a cash distribution (if any);
  • In-Kind Distribution – for investors who have purchased a certain minimum number of Units, they may have the option to receive an in-kind distribution of the underlying securities held in the UIT.

• Redemption of Units: UIT’s are similar to mutual funds, but unlike closed-end funds, in that Units may be redeemed, or sold back to the broker acting on behalf of the fund or sponsor, at their approximate net asset value (“NAV”).

Investments in UITs are typically subject to a number of charges, including:

• Sales Charges: UIT investors are typically charged a load, or up-front sales charge at the time of purchase; additionally, investors are often charged a deferred sales charge which may be paid monthly from the trust assets;

• Organizational Fees: UIT investors may be charged a fee from the trust sponsor for creation and development of the trust and organization of the portfolio; this fee is typically charged at the end of the UIT offering period and is paid directly from trust assets;

• Annual Operating Expenses: UIT investors are typically charged an annual fee to account for portfolio supervision, bookkeeping, administration and the like.

Under the right circumstances, a broker’s recommendation to purchase a particular UIT may be prudent and in keeping with the investor’s risk profile and stated investment objectives. However, as with other financial products, the recommendation to purchase UITs may also call into question the suitability of the investment recommendation, as well as possible broker misconduct concerning the fees associated with the investment.

In general, when recommending the purchase of a security -- a stockbroker or registered representative, and by extension the brokerage firm which employs that financial advisor and is charged with supervision of its employees -- must seek to ensure that the recommended security is suitable to that investor’s profile and stated investment objectives. In certain instances, brokers have been subject to fines and censure by the Financial Industry Regulatory Authority (“FINRA”) where inappropriate and unsuitable UITs were marketed and sold to investors who were unaware of the risks associated with the UITs.

In other instances, brokers have been suspended from the securities industry by FINRA due to their sales practice violations based upon directing their clients to engage in a trading strategy that amounted to little more than switching from one UIT to another in a short period of time in order to generate fees to the benefit of the broker and at the expense of the investor. Due to such frequent UIT switching, investors were left paying excessive commissions on these frequent trades, thus incurring losses on their investments.

At Law Office of Christopher J. Gray, P.C., our securities attorneys have managed cases from inception to conclusion involving a wide range of claims against brokers and financial advisors, including but not limited to: the sale of unsuitable securities, breach of fiduciary duty, churning, as well as misrepresentation and omission claims. If you have invested in what may be unsuitable UITs or other products, or your financial advisor has recommended frequent UIT switching, and such investments have incurred considerable losses due to poor performance and/or excessive fees, you may be able to recover your losses in FINRA arbitration. Investors who wish to discuss a possible claim may contact a securities arbitration attorney at Law Office of Christopher J. Gray, P.C. via the contact form on this website, by telephone at (866) 966-9598, or by e-mail at newcases@investorlawyers.net for a no-cost, confidential consultation.