Hennion & Walsh agrees to Pay Fines and Restitution for Allegedly Failing to Supervise Brokers in Unsuitable Series-to-Series UIT SwitchingFriday, February 8, 2019
On January 23, 2019, the Financial Industry Regulatory Authority (FINRA) Department of Enforcement imposed sanctions against Hennion & Walsh, Inc., a registered broker-dealer headquartered in Parsippany, New Jersey with approximately 131 registered representatives.
According to the Letter of Acceptance, Waiver and Consent (AWC), Hennion & Walsh failed to establish and maintain a supervisory system reasonably designed to detect and prevent unsuitable series-to-series Unit Investment Trust (UIT) switching.
UITs are investment companies that offer fixed portfolios redeemable shares of securities in a public offering. Generally two years after the initial offering, the underlying securities are sold and the proceeds are paid to investors at the termination date. UITs offer investors an opportunity to invest in a diversified securities portfolio with a low initial investment requirement and are meant to be held to their termination date. If an investor sells a UIT before the termination date and purchases another, he/she incurs front-loaded sales charges that would have been avoided if the UIT had been rolled over to a new UIT at the termination date.
The AWC states that Hennion & Walsh sponsored proprietary UITs with approximately two dozen portfolio strategies to be sold to retail investors. UITs with similar portfolios were issued in consecutive series. The Proprietary UITs had a 3.95 percent maximum sales charge, with one percent deducted from the principal amount on the first day. The remaining sales charge was deferred and taken out in three monthly installments at the end of the offering period.
FINRA claims that between December 1, 2011 and December 31, 2016, during this offering, 29 Hennion & Walsh registered representatives recommended 645 unsuitable early exchanges between UITs that had similar investment objectives, a practice known as “series-to-series switching,” in 438 customer accounts. As a result, Hennion & Walsh customers allegedly incurred over $305,000 in unnecessary sales charges.
FINRA asserts that Hennion & Walsh failed to provide reasonable guidance to its sales representatives on suitability concerns of Proprietary UITs and failed to complete daily trade reviews or train its principal in charge of these reviews on how to evaluate series-to-series switches. Based on the foregoing, Hennion & Walsh violated NASD Rules 2310 and 3010(a) and FINRA Rules 2111 3110(a) and 2010.
Without admitting or denying the allegations made against it, Hennion & Walsh consented to a censure, a $165,000 fine, and to pay $305,438.83 restitution to the customers.
If a broker was not properly supervised while registered at a brokerage firm, the firm can be held liable for the broker’s misconduct. Did you invest in Proprietary UITs at Hennion & Walsh, Inc. and lose money? If so, you may be able to recover from the registered representative or the firm. Since 1998, we have been representing victims of investment fraud and broker misconduct. Call us (1-877-410-8172) today for a free, no obligation consultation.