WSP failures cost Oppenheimer $3.8 million

The Financial Industry Regulatory Authority (FINRA) hit Oppenheimer & Co. Inc. with a more than $3.8 million charge as restitution to customers who incurred potentially excessive sales charges caused by early rollovers of Unit Investment Trusts (UITs). FINRA also fined the firm $800,000 for failing to reasonably supervise early UIT rollovers.

Was it a premature UIT rollover?

Yes. UITs are investment companies that offer investors shares, or “units,” in a fixed portfolio of securities in a one-time public offering that terminates on a specific maturity date, often after 15 or 24 months. They generally are intended as long-term investments. UIT sales charges are based on their long-term nature, including an initial and deferred sales charge and a creation and development fee.

Registered representatives who recommend that a customer sell his or her UIT position before the maturity date and then “rolls over” those funds into a new UIT cause the customer to incur increased sale charges over time. FINRA says this raises suitability concerns.

Oppenheimer’s early rollovers

From January 2011 through December 2015, FINRA says that Oppenheimer executed more than $6.4 billion in UIT transactions – $753.9 million of which were early rollovers. Moreover, FINRA found the firm’s written supervisory procedures and its supervisory system – which did not involve the use of automated reports or alerts – were not reasonably designed to supervise the suitability of those early rollovers.

This meant that Oppenheimer could not and did not identify that its representatives recommended potentially unsuitable early rollovers that, collectively, may have caused customers to incur more than $3.8 million in sales charges that they would not have incurred had they held the UITs until their maturity dates.   

According to Jessica Hopper, Senior Vice President and Acting Head of FINRA’s Department of Enforcement, “FINRA member firms must be mindful of costs to customers when recommending a product, particularly when recommending that customers make short-term sales of products that are intended as long-term investments.” Getting Oppenheimer to pay back those overeager gains, she says, became “a top priority for FINRA.”  

Did cooperation help Oppenheimer?

Yes, it did. In determining the fine against Oppenheimer, FINRA did recognize the firm’s extraordinary cooperation for having:

1. provided substantial assistance to FINRA’s investigation, including by retaining an outside consultant to analyze the firm’s UIT trading and voluntarily sharing the results of the consultant’s analysis with FINRA;
2. developed and implemented a methodology that efficiently identified customers eligible for restitution; and
3. voluntarily employed corrective measures to revise its procedures to avoid recurrence of the conduct described above, including by establishing automated alerts to identify when representatives recommend early UIT rollovers.

This enforcement action, Hopper notes, is in keeping with FINRA’s 2018 Regulatory and Examination Priorities Letter priorities, which advised those in the industry that the Authority would be reviewing firms’ supervisory controls related to UITs.

Where was compliance?

Oppenheimer’s compliance team stepped right up to the plate once it became aware that its written supervisory procedures were insufficient to ensure compliance. That’s where Patrina could have helped. For more than 25 years, Patrina has been helping uniquely committed compliance professionals like you to stay on the “straight and narrow” efficiently and cost-effectively. So, let’s talk. Call 212-233-1155 to ask about Patrina’s cost-effective designated third-party services, our comprehensive 8-module compliance solution, and compliant data capture file storage, and records archiving specifically designed for the financial services community. Be smart. Be covered. Let’s talk.