The White Law Group is investigating the liability that brokerage firms may have for improperly selling municipal bond unit investment trust investments.
Unit investment trusts are formed when a trust sponsor puts together a portfolio of securities and then offers share units of the trust through brokers and investment houses. The UIT portfolio holds the initial securities until the termination date of the trust. Typically, a UIT will have a termination date (a date when the UIT will terminate and dissolve) that is established when the UIT is created (although some may terminate more than fifty years after they are created). The basic rules of UITs are governed by 15 USC § 80a–26.
A UIT does not actively trade its investment portfolio. That is, a UIT buys a relatively fixed portfolio of securities (for example, five, ten, or twenty specific stocks or bonds), and holds them with little or no change for the life of the UIT. This can be risky if the market moves against the portfolio. Unlike a more actively managed investment, like a mutual fund, a UIT portfolio that is not well positioned for the current market climate can be poised for substantial losses.
This is exactly the current risk of long duration bond UITs and municipal bond unit investment trusts.
A bond unit trust is an investment in a fixed, diversified group of professionally selected municipal or corporate bonds. As a unit-holder of a bond unit trust, you own a portion of every bond held in the trust. If the portfolio is comprised primarily of long duration bonds, when interest rates rise (as they are right now), the underlying value of the bonds will decrease substantially.
Unit investment trusts are strictly broker sold products and there is not an active secondary market for the units. The low visibility of UIT returns makes the rating of unit investment trusts difficult. Additionally, UITs one of the highest commission products sold by a financial advisor (often explaining the broker’s motivation in selling a UIT as opposed to a basket of municipal or corporate bonds.
UITs are also high cost investments, saddled with hefty transaction fees incurred both when the unit is first purchased and again when the unit dissolves. Investors are often charged initial sales charges, deferred sales charges, creation and development fees and organization cost fees.
Financial advisors have three basic responsibilities to their clients – to disclose the risks, features of any investment, to perform adequate due diligence on any investment that they recommend, and to only recommend investments that are appropriate for the client in light of that client’s age, investment experience, risk tolerance, and net worth.
Before recommending a bond unit investment trust investment, a financial advisor, at minimum, is required to disclose: (1) the UITs current price, (2) the commissions or markups that must be paid to acquire the UIT, (3) the current yield, the yield to maturity, and the yield to call the bonds being help in the trust, (4) the amount and timing of the bond payments, and, most importantly, (5) the risk of default or devaluation of the particular bonds held in the trust.
In today’s interest rate climate, a financial advisor must also make the investor fully aware of the UITs interest rate risk – i.e., the risk that the value of the bond portfolio held by the trust could decrease if interest rates increase.
Given the current interest rate climate, the following UITs, among others, have interest rate risk that may result in losses to the investor:
Advisors Disciplined Trust 325 – Tax Exempt Securitiers Trust NY Trust 270
Advisors Disciplined Trust 27 – New York Tax Exempt Bond Fund – Series 1
Claymore Sec Def 589 – Closed-End New York Muni Portfolio – Series 10
Claymore Securities Series 125 – National Insured Muni Bond Portfolio – Srs 95
Claymore Securities Series 141 – Investment Grade Corporate Def Ptf L/T – Srs 5
First Trust 1892 – New York Municipal Income Closed-End Portfolio Series 20
First Trust 1081 – Corporate Investment Grade Portfolio Long-Term – Series 4
First Trust 639 – Corporate Investment Grade Portfolio – Long Term Series
First Trust 718 – Corporate Investment Grade Portfolio Long Term – Series 2
Long-Term Corporate Investment Grade Trust – Series 60
Long-Term Corporate Investment Grade Trust – Series 61
Long-Term Corporate Investment Grade Trust – Series 58
Long-Term Corporate Investment Grade Trust – Series 62
Advisor Disciplined Trust 193 – Taxable Municipal Bond Portfolio – Series 1
Advisors Dis Tr 264 – Tax Exempt Securities Trust National Trust 448
Advisors Dis Tr 454 – Insured Tax Exempt Municipal Ptf Long Term – Series 11
Advisors Dis Tr 504 – Ins Tax Exempt Muni Portfolio Large Term Series 14
Advisors Dis Tr 522 – Build America Bond Ptf Srs 12 An SMC FIM Ptf
Advisors Dis Tr 524 – Build America Bond Ptf – Series 13 An SMC FIM Ptf
ARISred Municipals Income Trust – Series 615
Build America Bonds Income Trust 10-20 Year – Series 1
Build America Bonds Income Trust – Series 30
Claymore Sec Def 561 – Closed-End National Municipal Portfolio – Series 14
Claymore Sec Def 581 – Closed-End National Muni Portfoli – Series 15
Claymore Sec Def 584 – Claymore/Guggenheim Long-Term National Mun Tr – Series 1
Claymore Sec Def 634 – Closed-End National Municipal Portfolio – Series 16
Claymore Sec Def 700 – Claymore/Guggenheim Build America Bds Tr – Series 1
Claymore Securities Series 120 – National Insured Municipal Bond Ptf – Series 94
Claymore Securities 219 – Claymore Municipal Portfolio 2011-2015 – Series 4
Claymore Securities – 228 Municipal Portfolio 2011-2015 – Series 6
Claymore Securities Def – 540 Closed-End National Municipal Portfolio Series 13
Claymore Securities Series 246 – Claymore Municipal Portfolio 2011-2015 Series 9
Claymore Securities 221 – Long Term Municipal Portfolio – Series 1
Claymore Securities 199 – IQ/Claymore Municipal Portfolio 6-10 years – Series 1
Claymore Securities 202 – Municipal Portfolio 2011-2015 – Series 2
First Trust – 1858 Municipal Income Closed-End Portfolio Series 29
First Trust 1955 – Municipal Income Closed-End Portfolio Series 30
First Trust 2020 – Municipal Income Closed-End Portfolio – Series 31
First Trust Combined Series 333 – Tax Exempt Municipal Inc Tr – Srs 260
Guggenheim Def Ptf Srs 719 – Closed-End National Muni Ptf – Srs 18
Insured Municipals Income Trust
Investment Grade Municipal Trust
Investors Quality Tax-Exempt Trust
Quality Municipal Income Trust
Van Kampen 1002 – Closed-End Str Cohen & Steer Mstr Muni Inc Pft – Nat 20
Van Kampen 1050 – Conservative Municipal Income Portfolio – Series 1
Van Kampen 775 – Closed-End Str Coh&Strs Mstr Mun Inc Nat – Series 13
Van Kampen Investment Grade Municipal Trust
Van Kampen 1021 – Closed-End Str Master Mun Inc Ptf NY – Series 12
Van Kampen 955 – Closed-End Strategy Cohen&Steers Master Mun Inc NY 11
If your financial advisor failed to advise you of the risks of a municipal or long duration bond unit investment trust and you suffered substantial losses, you may be able to recover those losses in a FINRA arbitration claim.
For a free consultation with a securities attorney, please call The White Law Group at 312/238-9650. The White Law Group is a national securities fraud, securities arbitration, and investor protection law firm with offices in Chicago, Illinois and Boca Raton, Florida.
For more information on The White Law Group, visit https://www.whitesecuritieslaw.com.