Unit Investment Trusts (UITs): What They Are, How They Work, and What Reg BI Requires When Recommendations Go Sideways

Unit investment trusts occupy a strange middle ground in the investment landscape. They’re often marketed as straightforward: a defined portfolio, a defined timeline, and a defined objective—packaged into “units” that investors can buy in one transaction. For the right investor, that structure can be genuinely appealing. But the very features that make UITs easy to describe can make them easy to misunderstand, and easy to sell in ways that raise serious best-interest and supervisory concerns.

A recent FINRA disciplinary settlement involving Carter, Terry & Company, Inc. illustrates the point. The case, Carter, Terry & Company, Inc., FINRA AWC No. 2023078794802 (Dec 4, 2025), did not revolve around exotic derivatives or esoteric trading strategies. It centered on the real-world mechanics of UIT recommendations—particularly early redemptions and rollovers—and how the cost structure can turn a product that might be appropriate as a buy-and-hold investment into something that becomes difficult to justify when repeatedly traded.

What follows is a practical guide to what UITs are, how they differ from mutual funds, where investors and firms can get into trouble, and why Regulation Best Interest (Reg BI) and FINRA’s supervision rules matter so much in this space.

What a Unit Investment Trust Actually Is

At its core, a UIT is a registered investment company that makes a one-time public offering of a fixed number of “units” representing interests in a portfolio of securities. Unlike actively managed funds, the portfolio is generally set at the outset and then remains largely unchanged for the life of the trust, subject to limited events (like corporate actions). The trust also has a stated termination or maturity date, at which point the underlying holdings are liquidated (or otherwise disposed of pursuant to the trust terms) and proceeds are distributed to unit holders.

FINRA’s investor guidance emphasizes this “fixed portfolio + fixed term” concept and notes that UITs are typically designed to be held for the life of the trust, even though investors can often redeem early (and, in some cases, sponsors maintain a secondary market).

This structure is not merely a definitional detail. It’s the foundation for how UITs should be evaluated under Reg BI, because the product’s economics and intended holding period are deeply connected.

How UITs Are Typically Offered and Why “Series” Matter

Many UIT sponsors offer successive “series” that are launched in sequence, often around the time prior series are reaching maturity. These series may have similar investment objectives and themes even if the specific holdings change.

In practice, that means a customer can be presented with what feels like a familiar “next version” of a prior UIT. Sometimes that “rollover” is appropriate. Sometimes it is not. The legal and compliance risk spikes when rollovers happen early, or when the customer is moved from one UIT to another in a way that repeatedly triggers upfront charges.

The Fee Structure: Where the Trouble Often Starts

A UIT’s costs can be less intuitive than the marketing pitch. In the FINRA settlement referenced above, FINRA described a “typical” UIT as including three separate upfront charges: a deferred sales charge (often in the neighborhood of roughly 1.35%–2.30% depending on sponsor and term), a creation and development fee (often 0.5%), and an organization cost (often roughly 0.25%–0.75%).

FINRA also noted in that settlement that, in many UIT structures, certain charges (including the creation and development fee and organization costs) are typically assessed during the early months of the UIT’s life, and after those are paid there may be no additional sales charges for the remainder of the trust’s term (though operating expenses can still apply).

This matters because a UIT is generally designed as a “buy it and hold it through the term” product. When a customer redeems early, the customer can end up paying material charges or costs without receiving the time-in-market benefit the structure was built around—then paying a new set of upfront charges to get into the next UIT.

FINRA captured the basic math succinctly: if a customer buys a 15-month UIT and holds to maturity, the customer might incur an upfront charge of around 2.15%. But if a customer buys and sells three UITs during that same 15-month period, the customer could pay sales charges of 6.45% or more—and the justification becomes especially difficult when the “new” UIT is essentially the next series of the same strategy.

That cost layering is not a technicality. Under Reg BI, costs are not optional to consider; they are central.

UITs vs. Mutual Funds: The Differences That Actually Matter

Investors and even some professionals tend to compare UITs to mutual funds because both are pooled investments. But the differences are often the whole story.

A mutual fund is typically an open-end investment company that continuously offers and redeems shares and is usually actively managed (or at least actively rebalanced according to its mandate). UITs, by contrast, generally make a one-time offering of a fixed number of units, hold a generally fixed portfolio, and terminate on a specified date established at formation.

From a suitability and best-interest standpoint, that means a mutual fund recommendation is often analyzed through an “ongoing strategy and expenses over time” lens, while a UIT recommendation should be analyzed through a “defined term, defined portfolio, and defined cost/holding period” lens. When that holding period is shortened through early redemption or repeated rollovers, the UIT analysis changes dramatically.

What the FINRA Settlement Shows Can Go Wrong

The Carter, Terry & Company settlement is a useful case study because it ties together the product mechanics, Reg BI’s care and compliance obligations, and FINRA’s supervision rule in a single narrative.

FINRA found that since June 30, 2020, the firm failed to establish, maintain, and enforce a supervisory system (including WSPs) reasonably designed to achieve compliance with Reg BI’s Care Obligation for UIT recommendations, and also failed to establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Reg BI (a Compliance Obligation issue). FINRA alleged violations of FINRA Rules 3110 and 2010, and Reg BI-related obligations.

FINRA described how, until April 30, 2023, the firm had no written policies or procedures addressing UIT recommendations, including early redemption recommendations, and later WSP updates still did not require cost consideration or provide criteria for supervisors to evaluate whether an early redemption was in a customer’s best interest.

FINRA also described a supervision design gap: the firm relied on an automated report that identified certain UIT transaction patterns but did not identify early redemptions, and reviewers were not directed to manually identify early redemptions—meaning they lacked a basis to detect recommendations that could be generating unnecessary sales charges.

Even after the firm began requiring representatives to submit forms for early UIT redemptions, FINRA alleged the firm lacked a process to ensure those forms were actually submitted, and forms were missing for over 100 early redemptions. For the forms that were submitted, FINRA alleged the firm generally accepted the representative’s stated rationales and approved every early UIT redemption that received supervisory review.

The alleged impact was significant. FINRA stated that, collectively, these recommendations caused customers to pay $176,590.57 in costs and fees that they would not have incurred had they held the UITs to maturity.

The sanctions included a censure, a $75,000 fine, restitution of $176,590.57, and an undertaking requiring senior management certification of remediation and implementation of a supervisory system designed to achieve compliance with Reg BI regarding the issues identified.

Whether you read this as an investor cautionary tale or a firm risk-management lesson, the through-line is the same: UITs are not inherently “bad,” but the economics of early redemptions and rollovers can make the best-interest analysis—and the supervision framework—critical.

Reg BI in the UIT Context: Why “Care” Is Not a Slogan

Reg BI requires broker-dealers and their associated persons, when making recommendations to a retail customer, to act in the customer’s best interest at the time of the recommendation and not place the firm’s or representative’s interests ahead of the customer’s.

Reg BI is built around four component obligations—Disclosure, Care, Conflict of Interest, and Compliance. The UIT cases tend to live in the Care and Compliance lanes, but they are rarely isolated from conflicts questions because compensation structures can create incentives to recommend “switching” or “rolling” rather than holding.

The Care Obligation: Understanding, Costs, and Alternatives

The SEC staff’s Care Obligation guidance makes the central point plainly: firms and financial professionals need to understand the investment or strategy they are recommending, including risks, rewards, and costs, and must form a reasonable belief that the recommendation is in the retail investor’s best interest based on the investor’s profile at the time.

In the UIT context, that means you cannot treat a UIT as a generic “diversified product” and stop there. You need to understand the trust’s term, the sales charge structure, and how the customer’s expected holding period interacts with those charges. When you recommend an early redemption, you are not merely recommending a sale; you are effectively altering the economics of the original recommendation and creating the conditions for cost stacking if proceeds go into another high-upfront-charge product.

Reg BI also contains a specific caution for “series of transactions.” Even if each individual transaction might look acceptable in isolation, a series of recommended transactions can violate Reg BI if it is excessive and not in the customer’s best interest when taken together. UIT rollovers—especially early and repeated—are almost tailor-made for that kind of scrutiny.

The Compliance Obligation: Policies and Procedures That Actually Work

Reg BI does not stop at “do the right thing.” It requires firms to establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance.

That is where many firms get caught flat-footed. It is easy to have a policy document that says “consider costs” or “act in the customer’s best interest.” It is much harder to build a system that identifies risk patterns, forces meaningful documentation, and gives supervisors criteria to evaluate whether a recommendation—especially a high-cost switch—makes sense for the customer.

The FINRA settlement described above is essentially a roadmap of how regulators evaluate “reasonably designed” in practice: do you have written procedures, do they require cost consideration, do they provide decision criteria, do your surveillance tools detect the relevant behavior (like early redemptions), do you ensure required documentation is actually submitted, and do supervisors have enough information to challenge weak rationales rather than rubber-stamping?

FINRA Rule 3110: Supervision Is Not Optional, and “Reasonably Designed” Has Teeth

FINRA Rule 3110 requires firms to establish and maintain a system to supervise the activities of associated persons that is reasonably designed to achieve compliance with securities laws and FINRA rules, and to maintain and enforce written supervisory procedures.

That rule is frequently charged alongside Reg BI in enforcement actions because, in real life, Reg BI compliance is inseparable from supervision. If the firm’s systems don’t detect and escalate problematic patterns—like repeated early UIT rollovers—the firm is exposed even if there is no allegation that senior management intended for harm to occur.

In other words, supervision is how “best interest” becomes operational. In the UIT context, a supervision system that ignores early redemptions is not merely incomplete; it may be blind to the highest-risk recommendations.

Practical Takeaways for Investors: How to Pressure-Test a UIT Recommendation

UITs can be appropriate for some investors. But if you are evaluating one, the safest approach is to ask questions that force the economics into the open.

Start with time horizon. UITs are often structured around a defined term, and the cost structure presumes you will hold long enough for the upfront charges not to overwhelm returns. FINRA’s investor materials emphasize that the termination date can be relatively short (often around 15 months to two years, though it varies), and early redemption is possible, but the investment is generally designed around holding for the trust’s life.

Then ask what you pay and when you pay it. A UIT prospectus should disclose sales charges and other costs, but the more important question is what those costs mean for you if you don’t hold. The FINRA settlement described above explains why early redemption and rollover can materially increase aggregate sales charges over the same time period.

Finally, ask what the alternative is. If the recommendation is to redeem early and roll into a new UIT, ask why holding the current UIT is not in your best interest. If the answer is vague—“new opportunity,” “fresh series,” “it’s time to rotate”—that is a sign to slow down. Under Reg BI’s framework, costs and reasonably available alternatives should be part of the analysis, not an afterthought.

If you believe you were steered into repeated UIT rollovers, early redemptions without a sound rationale, or cost stacking that was not adequately explained, it can be worth having an experienced securities attorney review the trade history and disclosures to assess potential FINRA arbitration claims.

Practical Takeaways for Firms and Financial Professionals: How to Reduce Exposure Without Killing the Product

From the broker-dealer perspective, UITs should be treated as a product category where supervision needs to be intentional. The settlement described above is a cautionary example of what regulators expect firms to implement, particularly with respect to cost analysis and early redemption monitoring.

A coherent UIT supervision framework usually starts with defining what triggers scrutiny. It should capture the period where customers are most likely to be harmed by paying upfront charges without sufficient holding time—especially if proceeds are rolled into another product with a similar upfront charge profile. Once that trigger is defined, the firm needs surveillance that actually detects it; a report that flags UIT purchases after UIT liquidations but fails to identify early redemptions is unlikely to satisfy regulators if it systematically misses the highest-risk transactions.

Next comes documentation that is meaningful. A form requirement does not help if the firm does not enforce submission, does not reconcile missing forms, and does not give supervisors criteria for evaluating the rationale. The settlement described FINRA’s concern where forms were missing for a large number of early redemptions and where, when forms existed, rationales were generally accepted and all reviewed early redemptions were approved.

Finally, the system should be designed to catch patterns. Reg BI’s “series of transactions” lens makes repeated early rollovers a natural exam and enforcement target. A firm that can show it identifies patterns, escalates outliers, and documents cost-aware decision-making will be in a materially stronger position in an exam, an enforcement inquiry, or a Wells-style discussion—even when mistakes occur.

When a matter does arise, early strategic handling matters. A FINRA defense attorney can help firms triage the issue, preserve and organize the right evidence, evaluate root causes, and present remediation in a way that aligns with how FINRA actually assesses “reasonably designed” supervision and Reg BI compliance.

How AMW Law PLLC Can Help

AMW Law PLLC represents both individual investors and financial professionals, including broker-dealers and registered representatives, in FINRA arbitrations and regulatory matters. We regularly advise on Reg BI issues, supervisory frameworks under FINRA Rule 3110, and responses to FINRA information requests and enforcement inquiries pursuant to FINRA Rule 8210. If you are an investor concerned about UIT rollovers or sales-charge stacking, we can evaluate potential claims and remedies. If you are a firm or financial professional facing a FINRA exam or enforcement investigation, we provide experienced FINRA defense counsel focused on pragmatic risk reduction and strategic resolution.