Western International Securities Inc. is a brokerage firm headquartered in Pasadena California who has been censured and fined one hundred twenty five thousand dollars by Financial Industry Regulatory Authority (FINRA) based upon accusations that it failed to create and implement adequate supervisory procedures and systems for purposes of making sure that non-traditional exchange traded fund recommendations were compliant with FINRA rules as well as securities regulations and laws. Letter of Acceptance Waiver and Consent No. 2015047682404 (Feb. 28 2018).
According to the AWC, between January of 2011 and November of 2015, a total of ten thousand eight hundred non-traditional exchange traded fund transactions had been solicited in one thousand five hundred sixty-two accounts owned by the firm’s retail customers. Apparently, one hundred eighty-two of the firm’s stockbrokers collectively effected a total of one hundred ninety-seven million dollars in non-traditional exchange traded funds transactions.
The AWC stated that the firm did not provide adequate supervision of inverse, leveraged as well as inverse-leveraged exchange-traded funds that had been executed by its stockbrokers. Apparently, the firm lacked procedures and policies which detailed the risks and features relating to non-traditional exchange traded funds. Moreover, the firm was void of a supervisory system geared to reasonably assess the specific risks that non-traditional exchange traded funds contained, which included risks pertaining to the funds having been held long term. Critically, the AWC stated that broker-dealers were advised by FINRA that the non-traditional funds were generally not appropriate for investors planning to hold their positions in the funds for longer than one trading session.
The AWC stated that no alerts or exception reports were utilized by the firm in regard to non-traditional exchange traded funds, nor were there any tools that the firm utilized that were able to identify situations when a non-traditional exchange traded fund diverged from an index it had been linked to. Evidently, no automatic method for monitoring and calculating holding periods had been implemented by the firm. Consequently, FINRA found that the firm’s non-traditional exchange traded fund business was not adequately supervised; conduct violative of FINRA Rules 2010, 3110 and National Association of Securities Dealers (NASD) Rule 3010.
Moreover, the AWC stated that Western International Securities also neglected to conduct a suitability analysis concerning inverse, leveraged and inverse-leveraged exchange-traded funds so that the features and risks pertaining to those products were understood prior to the investments having been offered by stockbrokers of the firm or recommended by stockbrokers for longer-term holdings periods.
The AWC revealed that specific customers were targeted by the firm’s stockbrokers, wherein the firm’s stockbrokers effected unsuitable purchases of non-traditional exchange traded funds in customers’ accounts after having solicited the transactions. Apparently, the products had been recommended to conservative investors for longer term holding periods.
In one case, the AWC stated that a seventy-three year old investor with a conservative tolerance for risk had been solicited to invest in five non-traditional exchange traded funds with a portion of the customer’s $200,000.00 net worth. Those non-traditional exchange traded funds had been held for three hundred fifty-six days on average, causing the customer to sustain $20,232.41 in investment losses.
In another case, five exchange traded funds had been positioned to a seventy-one year old customer with a $200,000.00 net worth and low risk tolerance. The customer apparently held those five exchange traded funds for three hundred forty-six days on average, causing the customer to sustain a $22,670.14 loss. Another customer with a low risk tolerance reportedly held positions in five non-traditional exchange traded funds for about three hundred fifty days, wherein the customer sustained a $32,865.00 loss.
Ultimately, FINRA concluded that the firm permitted its stockbrokers to make investment recommendations of the non-traditional exchange traded funds without an adequate understanding of the features and risks, and allowed the firm’s stockbrokers to have recommended exchange traded funds to investors that were unsuitable based upon the customers’ financial status, objectives for investing and ages. Consequently, FINRA found that the firm’s non-traditional exchange traded transactions were not suitable for customers; conduct violative of FINRA Rule 2111 and NASD Rule 2310.
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