Finra has fined a California-headquartered broker dealer $475,000 for a years-long failure to establish and maintain adequate supervisory systems to prevent excessive trading that resulted in millions of dollars in trading costs across roughly one hundred accounts.
The sanction against the firm, Western International Securities, follows a Finra investigation regulator that revealed it did not properly supervise trading activities between January 2016 and June 2020.
According to the AWC document published Monday, Western operates as a full-service broker-dealer with approximately 390 registered representatives across over 100 branch offices.
Finra found that during the relevant period, Western's written supervisory procedures (WSPs) were inadequate and did not provide supervisors with the necessary tools or guidance to recognize critical red flags of excessive trading, such as cost-to-equity ratios and turnover rates.
“As a result, Western failed to reasonably respond to trading in approximately one hundred accounts that appeared to be potentially excessive and unsuitable,” Finra said.
Among the scores of supervisory gaffes, Finra said four of Western’s registered reps engaged in excessive trading in nine customer accounts between January 2016 and December 2019. That high-octane churning, which produced an average cost-to[1]equity ratio of 30 percent and an average turnover rate of 8, led to more than $2.5 million in trading costs for the customers in those accounts, Finra estimated.
In one notable case, a senior customer's accounts were subject to hundreds of in-and-out trades, generating a cost-to-equity ratio of 30 percent. That case alone accounted for over $1.5 million in commissions and trading costs.
Western’s response to those excessive trades – asking the customer to acknowledge the activity without any detailed explanation of the potential issues – allowed the problematic trading to continue unchecked for 18 months, Finra said.
The firm’s passive approach to such issues, where compliance staff sent activity letters but didn’t track red flags or patterns of rapidly accelerating trades, for example, meant customers weren’t fully awareof the risks associated with active trading in their accounts, Finra said.
As a result of these supervisory shortfalls, it said Western International Securities violated Rules 3110 and 2010.
Aside from the $475,000 fine, Finra has ordered Western to pay affected customers more than $1 million in restitution. Its senior management has also been required to certify in writing that the firm has implemented a supervisory system and WSPs reasonably designed to prevent future violations.
"The outcome is correct, but it's disappointing that FINRA had ample opportunity to investigate the merits of clients' allegations in these claims, including the testimony in the three investor arbitrations with hearings," Jeff Erez, a plaintiff's attorney representing a large portion of the Stifel clients, said.
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