Coastal Equities Inc. a securities broker dealer headquartered in Wilmington Delaware has been censured by Financial Industry Regulatory Authority (FINRA) supported by findings that Coastal Equities failed to supervise a stockbroker who recommended unsuitable and excessive trades for the accounts of Coastal Equities customers. Letter of Acceptance Waiver and Consent No. 2017052325702 (Nov. 9, 2020).
According to the AWC, between October of 2016 and July of 2018, a stockbroker named SA who was registered with Coastal Equities from September of 2015 and July of 2018 had not been supervised by Coastal Equities. The stockbroker’s direct supervisor knew about SA making unsuitable and excessive trades in no less than four retired customers’ accounts. The direct supervisor was also aware of bad advice by SA in regard to two customers’ purchases of securities using margin. The regulator indicated that Coastal Equities failed to take reasonable action in response to these concerns.
The AWC stated that when SA was associated with Coastal Equities, the securities broker dealer used daily trade blotters to undertake the review of SA’s transactions. The blotters revealed cost-to-equity ratios and turnover rates for those customer accounts traded by SA. The regulator pointed out that SA’s frequent stock trading was detected by the securities broker dealer’s trade blotter. The securities broker dealer’s supervisor also knew of other accounts which indicated that SA had excessively traded. But SA told the supervisor that his trading was approved by customers. The supervisor just went along with that explanation without taking additional steps to confirm trades with customers.
FINRA revealed that more red flags became visible within Coastal Equities’ daily blotter of SA’s transactions. These red flags showed excessive, unsuitable trades recommended to customers by SA. The stockbroker told moderate risk customers to use margin for effecting certain of those recommended transactions.
The AWC noted that each customer had cost-to-equity ratios exceeding 20 percent and turnover rates exceeding 6 which signaled excessive trading. The regulator indicated that in some of those accounts traded at SA’s direction, cost-to-equity ratios exceeded 50 percent and turnover rates surpassed 20.
The exception reports which Coastal Equities started using in August of 2017 also flagged those four customers’ accounts. From October of 2016 to December of 2017, none of those accounts were assessed to determine the suitability of SA’s recommendations. There were no steps taken to reduce commissions charged by SA to his customers. There was no review of the frequency in which trades were placed in customer accounts. Recommendations of excessive or unsuitable trades had continued to be made by SA after the securities broker dealer started contacting his customers and recommended for SA to transition customers’ accounts to being fee-based.
FINRA found that Coastal Equities violated FINRA Rules 2010 and 3110.