By Esmat Hanano, Spring 2018 IAC Student Intern
The Financial Industry Regulatory Authority (FINRA) has released its annual Regulatory and Examination Priorities Letter. One of the biggest priorities for FINRA in 2018 is monitoring the use of Unit Investment Trusts, or UITs. What exactly is a UIT you may ask?
The Securities and Exchange Commission (SEC) lists UITs as a basic investment vehicle, or investment company, that buys a fixed portfolio of securities and does not actively trade them. A UIT is put together by a sponsor, typically, a brokerage firm. Once the sponsor has assembled the portfolio, it then makes a public offering of the UIT and uses brokers to sell “units” to investors. Investors can sell their units back to the sponsors, and sponsors will sell those reacquired units on a secondary market to new investors. Once a UIT has been created, a termination date is set. When a UIT is terminated, any remaining securities will be sold and the proceeds divided among the investors.
FINRA has flagged UITs because it “has observed firms experiencing problems implementing effective controls.” The fixed nature of UITs creates the impression that they are inherently stable investments. However, the stability of a UIT depends on the underlying assets and theme of the trust. For example, one that invests in high grade government or municipal bonds would be much safer than one that invests in growth stocks. The SEC warns “. . . just because a UIT had excellent performance last year does not necessarily mean that it will duplicate that performance.” As with all investment opportunities, a broker should perform due diligence to make sure that the investment is suitable for the potential investor.