ITU’s first shifts result in FINRA fine – Finance and Banking


United States: First ITU overturns result in FINRA fine

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In recent years, structured products have emerged in a new form – a mutual fund envelope (“ITU”). These UITs, as opposed to typical UITs with a basket of common stocks as trust assets, have structured note payments, with features such as buffers, leverage, and caps. Structured ITUs have the same pricing structure as typical ITUs: up-front selling costs, deferred selling costs, and creation and development costs.

Recently, a broker was fined $ 8.4 million by the Financial Industry Regulatory Authority, Inc. (“FINRA”) for failing to oversee early unstructured ITU renewals.1 This happens when an investor in an existing ITU sells its position before maturity and buys in another ITU, often with the same or similar assets in the trust. The effect of this rollover on the investor is that the investor will pay increased sales charges over time. The broker had a system in place to report renewals for ITUs that took place seven months or less, but did not report renewals after seven months. Most UITs have a maturity of 15 to 24 months and are treated as long-term investments, to be held until maturity.

Broker-traders should ensure that ITU’s rolling functionality is not abused, whether in relation to unstructured ITUs, as in this case, or structured ITUs.

Originally published in REVERSEinquiries: Volume 4, Issue 4.
Click here to read the articles in this latest edition.


1. The FINRA press release and the letter of acceptance, waiver and consent can be viewed at: FINRA Order for $ 8.4 Million in Restitution to Customers for Supervisory Failures Involving UITs

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