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Unit Investment Trusts: What All Investors Should Know

What are Unit Investment Trusts?

A unit investment trust (UIT) is a company that holds a group of securities (typically stocks and bonds), selling them to investors as redeemable units for a set amount of time. There are 4,840 unit investment trusts in the U.S., representing $74.84 billion in market value. The impact of UITs should not be ignored, but investors should educate themselves on the unique features of UITs before investing.Registered with the SEC under the Investment Company Act of 1940, a unit investment trust is issued via an initial public offering (IPO). A UIT can be appealing to investors because the required initial investment is low. UITs are a solid option for investors looking for diversification and consistency, as the various securities contained within UITs don’t change. Still, you should research all securities contained within a UIT, which can be a time-consuming process.  There are pros and cons to UITs and you should consider where UITs might fit into your investment objectives, just as you would with any investment, like mutual funds or closed-end funds.

Unit Investment TrustsAlong with mutual funds and closed-end funds, UITs are one of the three basic kinds of investment companies. How do unit investment trusts differ from mutual funds? While UITs are like mutual funds in many ways, there are some important differences. UITs are not actively traded; the securities contained within the trust aren’t bought or sold unless there is a change in the structure of the underlying investment (like a merger). Because UITs are not actively traded, they have lower management fees than mutual funds. Yet this also means that dividends are not reinvested into the trust, so some investors may be better off directly investing in mutual funds or stocks.

One unique aspect of UITs is that they have a maturity date—anywhere from a few years to 30 years. When the trust reaches its maturity date, you as an investor have three choices: 1) you can take the “in-kind” delivery of their shares of the stocks, bonds, REITs, or other holdings of securities contained within the trust, 2) you can roll over the trust into a new UIT, if available, or 3) you can take the cash value of their returns.

Understanding Price Breaks

Broker-dealers often offer lower sales loads (fees) for large investments—determined either by the number of shares or the purchase price. This investment threshold is known as a “breakpoint.” While these volume discounts are known as “breakpoint discounts” when referring to mutual funds, they are known as “price breaks” when discussing unit investment trusts.

The SEC warns that a “brokerage firm is not allowed to sell shares of a mutual fund in an amount that is just below the mutual fund’s breakpoint simply to earn a higher commission.” Similarly, FINRA reminds broker-dealers that funds offering these discounts must disclose them and apply them. To this end, in February 2016, FINRA issued fines and ordered these broker-dealers to pay $1.2 million in restitution. InvestmentNews reported, “Next Financial Group Inc., Key Investment Services and Stephens Inc., were charged with failing to apply sales charge discounts to certain customers’ eligible purchases of unit investment trust, or UITs, and related supervisory failures, according to three Financial Industry Regulatory Authority Inc. settlements.”

That is not the only time that FINRA fined broker-dealers for failing to properly apply applicable price breaks. In October 2015, according to InvestmentNews, FINRA fined the following six broker-dealers $2.6 million and ordered them to pay restitution in the amount of $4 million:

FINRA also ordered fines and restitution against other firms: MetLife Securities Inc., Comerica Securities, Cetera Advisor Networks, Ameritas Investment Corp., Infinex Investments Inc., and The Huntington Investment Company.

There are many factors to consider when investing in unit investment trusts. If you’re thinking about investing in unit investment trusts, make sure you receive the proper price break, if applicable.

Next Steps

If you believe that your broker failed to apply applicable price break discounts when you purchased a unit investment trust, don’t hesitate to contact a securities attorney. Call (877) 238-4175 or email info@fkesq.com for your free consultation with the securities attorneys of Fitapelli Kurta.