RCA - September 1997 - Ask The Analyst - Unit Investment Trusts

Q: What information should member firms include in communications with the public when promoting equity strategy unit investment trusts (UITs)?

A: Typically, equity strategy UITs invest in stocks selected from a well-known index based on objective, easily verifiable criteria. For example, the UTT may purchase the 10 stocks from an index that yielded the highest dividends over the preceding year. The UIT holds the stocks for a short term (one or two years) and then dissolves. The sponsor may offer successive trusts with similar portfolios thereby allowing the investor to pursue the strategy over a number of years. In order to fairly describe these products as required by Rule 2210(d)(1)(A), communications with the public should clearly explain:

  • the investment is a fixed portfolio of securities with a one-year life (or other set term);

  • the strategy is a long-term one and, therefore, investors should consider their ability to pursue investing in successive trusts; and,

  • the tax consequences associated with rolling over an investment from one trust to the next.

Marketing materials for these UITs frequently illustrate how the strategy would have performed historically over the long-term (e.g., the previous 15 years), including time periods prior to the existence of the UIT or the series of UITs. This type of "strategy performance" is permitted where the strategy reflects objective, easily verifiable criteria. However, to clearly explain this hypothetical performance, the communication must disclose:

  • that the strategy performance is hypothetical and not indicative of the performance of a specific trust;

  • strategy performance that reflects the fees and charges associated with the UIT; and

  • the percentage amount of all sales charges (including deferred charges).

Comparisons of the hypothetical performance to the index would require disclosure that in any given year the strategy may lose money or underperform the index. Also, if cumulative or average annual total return performance is compared, then year-by-year data (or other consecutive time periods reflective of the UIT's term) for both the strategy and the index must be included.