FINRA, the U.S. financial services regulator has fined Oppenheimer & Co a fine of $3.8 million for its supervisory failures in investment trusts. Also, Oppenheimer will pay an additional $800,000 for a related offence to reasonably supervise early UIT rollovers.
The regulator ruled on the issue yesterday after investigations revealed that the company did not comply with the supervisory laws regarding unit investment trusts rollovers (UITs). As a result, Oppenheimer & Co will have to pay the fine as compensation to its customers. The restitution will cover for the loss incurred from excessive sales charges during the initial rollovers of the UITs.
As FINRA has explained, because UITs are meant for long-term investments, the sales charges are usually dependent on their long-term nature. These charges include a creation and development fee, as well as initial and deferred sales charges.
How FINRA decided on the appropriate fine for Oppenheimer
According to the regulator, the actions of Oppenheimer & Co have caused its customers to erroneously sell their UIT positions before their maturity date. When the customers take those funds into the new UIT, it caused them to have higher sales charges over time, which raises suitability concerns.
Investigations have revealed that Oppenheimer carried out more than $6.4 billion UIT transactions between January 2011 and December 2015. Out of that amount, early rollovers amounted to about $753.9 million.
The regulator also faulted the company’s supervisory system and written procedures regarding the UIT. According to FINRA, the firm did not use any form of automated alerts or reports, which goes against the rules of supervision on UITs.
FINRA confirmed that the lack of automated reports did not provide enough room for the right supervision of the eligibility of those early rollovers. Because of this failure, Oppenheimer did not find out that its representatives have recommended inappropriate early rollovers.
It caused the customers to lose about $3.8 million, which would not have happened if they had held their UITs until the date of maturity.
FINRA says Oppenheimer & Co cooperated throughout the investigation
When FINRA was issuing out its fines against the company, it considered a lot of things.
The regulator found out that Oppenheimer has cooperated with the investigations by offering valuable assistance to FINRA. This assistance includes paying an outside consulting company to carry out the investigation. It also volunteered to share the results of the findings with FINRA.
Secondly, Oppenheimer helped to develop a system that identifies the customers who are genuinely eligible for compensation.
Also, FINRA reiterated that Oppenheimer volunteered to use corrective measures to rectify the issues mentioned to prevent future occurrence. The company set up automated alerts to recognize when its representatives are recommending early UIT rollovers. And when the regulator was resolving the issue, Oppenheimer neither denied nor admitted the charges, but agreed to offer its full support during investigations.
According to FINRA, the charges against Oppenheimer would have been higher if they had not acted in a supportive way and agreed to make necessary corrections to prevent future situations.