In October 2019, FINRA ordered Investors Capital Corp. to pay $1.1 million in fines and restitution related to the sale of unit investment trusts (UITs) and steepeners, another complex financial product. Investors Capital Corp. is in the Cetera Financial Group network. The settlement included a $250,000 fine and $841,532.97 in restitution to 74 clients.
According to the settlement, Investors Capital Corp. failed to apply sales charge discounts to certain customers’ eligible purchases of UITs. It is also alleged that Investors Capital Corp., through its registered representatives, recommended unsuitable short-term UIT and steepener transactions.
UITs typically make a one-time public offering of a fixed number of units. UITs are investment companies that offer a fixed portfolio, generally of stocks and bonds, as redeemable units to investors for a specific period of time, often 15 or 24 months. UITs are designed to provide capital appreciation and/or dividend income. However, they impose charges including a deferred sales charge and a creation and development fee that can be around 3.95%. If a customer sells UITs before the maturity date, they will incur increased sales charges. When advisors sell UITs and roll over the funds into a new UIT, suitability concerns are often in question.
Steepeners are a complex type of structured product intended for sophisticated investors. It allows investors to bet on the shape of the yield curve, predicting that it will steepen and not remain flat. Steepeners are a type of interest rate swap, where one party agrees to pay the other a fixed rate in exchange for a floating rate that is derived from the difference between long and short term rates. Investors who invested in steepeners at the recommendations of their broker may have suffered serious financial losses. It is alleged that brokerage at brokerage firms across the United States recommended their clients invest in steepeners, which were unsuitable for their investment goals, causing significant investment losses. Steepeners often come with short-term teaser interest rates, long dated maturities, and obscure features that caused them to lose capital rapidly along with greatly diminished interest payments. Steepeners are not freely traded, are illiquid in many instances, and are often callable. Many investors have to sell their investments at significant losses. These types of structured products generally had long maturities such as 20 years. Given that the securities are not listed on an exchange and therefore highly illiquid, investors would have to sell the structured products at significant discounts if they sold prior to maturity.
According to the Letter of Acceptance, Waiver & Consent, between June 2010 and September 2015, two brokers registered with Investors Capital Corp. recommended unsuitable short-term UIT transactions in the accounts of customers; these investment are intended as longer-term investments and carry significant upfront charges and are not appropriate for short-term trading. The majority of the UITs at issue had maturity dates of two years or more. The two registered brokers made 971 short-term UIT transactions in the accounts of 11 firm customers without grounds for believing that such recommendations were suitable in view of the frequency, size, and cost of the transactions.
Additionally, FINRA found that between April 2011 and December 2012, the two brokers recommended unsuitable short-term trading of steepeners in the accounts of 63 customers, some which were held for only a month. In these instances, the customers’ short-term trading of the products meant that they were sold at a discount in an illiquid secondary market. The registered representatives did not have reasonable grounds for believing that this short-term trading in Steepeners was suitable in light of the frequency and size of the transactions, and each customer’s investment objectives, financial situation, and needs.
FINRA also found that between January 2009 and December 2013, Investors Capital Corp. failed to identify and apply sales charge discounts to certain customers’ eligible purchases of UITs. Investors Capital Corp. failed to apply sales charge discounts to almost 2,000 eligible UIT purchases, which resulted in customers paying excessive sales charges of approximately $472,876. It also found that between January 2009 and December 2013, the Investors Capital Corp. did not have an adequate supervisory system to identify and apply UIT sales charge discounts.
Pursuant to FINRA Rules, member firms are responsible for supervising a broker’s activities during the time the broker is registered with the firm. Therefore, Investors Capital Corp. may be liable for investment or other losses suffered by its customers.
Erez Law represents investors in the United States for claims against brokers and brokerage firms for wrongdoing. If and have experienced investment losses, please call us at 888-840-1571 or complete our contact form for a free consultation. Erez Law is a nationally recognized law firm representing individuals, trusts, corporations and institutions in claims against brokerage firms, banks and insurance companies on a contingency fee basis.