February 8, 2019
On January 23, 2019, FINRA 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.
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.