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Amid FINRA scrutiny of UITs, Advisor Group IBD settles case for $1.6M

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One of Advisor Group’s largest firms failed to adequately supervise a substantial portion of its $900 million in sales of an alternative product over five years, according to FINRA.

SagePoint Financial agreed to pay $1.6 million in fines and restitution to clients who paid sales charges on “potentially unsuitable” early rollovers of unit investment trusts to other UITs before their maturity dates, the firm’s June 10 settlement shows.

FINRA has found other such supervisory deficiencies of product exchanges at multiple firms, according to its latest report on examinations.

Between 2013 and 2017, the independent broker-dealer with some 1,800 registered representatives used no automated tools to detect “potentially unsuitable patterns of early UIT rollovers,” nor did it focus its reviews on the suitability of rolling over UITs before maturity, FINRA says.

As a result, some clients allegedly paid sales fees they wouldn’t have needed to if they held the products until maturity. While the regulator didn’t specify the number of clients involved in these transactions, FINRA says that nearly a third of the early rollovers were simply changed to later series of the same UITs with identical, or very similar, objectives and strategies.

In addition to restitution payments of $1.3 million plus interest, SagePoint agreed to a censure and a fine of $300,000.

The Phoenix-based firm’s written supervisory procedures “did not discuss early rollovers or series-to-series early rollovers or otherwise provide guidance to firm supervisors about how to monitor for potentially unsuitable patterns of early rollovers or series-to-series early rollovers,” according to the letter of acceptance, waiver and consent.

Representatives for SagePoint, with its approximately 815 offices nationwide as part of the Advisor Group IBD network, didn’t respond to requests for comment on the case.

The firm collected $17.2 million in sales charges on the $895 million in UIT transactions recommended by SagePoint’s reps over the five years of FINRA’s investigation. UIT sponsors waived the initial 1% sales charge for rollovers but still applied deferred sales fees of up to 2.5% and a “creation and development fee” of 0.5% of the offering price, according to FINRA.

“Because of the long-term nature of UITs, their structure and their costs, short-term trading of UITs may be unsuitable,” the settlement letter states.

More than $203.7 million of the UIT purchases recommended by SagePoint reps — or 23% — involved buying one or more new UITs using proceeds from selling others more than 100 days before their maturity, according to the regulator. Of the early rollovers, at least 32% — or $65.8 million worth of UITs — involved newer versions of the same underlying UIT, FINRA says.

The alt products are drawing scrutiny across the industry, according to FINRA’s 2019 report on examination findings and observations. Examiners uncovered supervisory problems at other firms with UIT exchanges, as well as rollovers of variable annuities and mutual funds, the report says.

The firms failed to maintain trade blotters to identify patterns of unsuitable exchanges, set up systems to verify the reps’ rationales for the transactions or, in certain cases, catch misrepresentations of the sources of money for the purchases, the regulator said.

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