Western International Securities Inc., headquartered in Pasadena, California, has been censured and fined $475,000.00 by Financial Industry Regulatory Authority (FINRA) because Western International Securities failed to supervise certain representatives who engaged in excessive trading in customer accounts. Letter of Acceptance, Waiver, and Consent No. 2021071099404 (June 15, 2023).
According to the AWC, from January of 2016 to June of 2020, Western International Securities did not have an adequate supervisory system, including written supervisory procedures, to ensure compliance with FINRA Rule 2111 regarding unsuitable and excessive trading.
FINRA stated that from January of 2016 to December of 2019, four stockbrokers engaged in excessive trading in nine customer accounts, resulting in an average turnover rate of 8 and average cost-to-equity ratio of 30 percent. The regulator stated that customers paid $2,500,000.00 in trading costs during this period.
Western International Securities’ supervisory procedures did not provide sufficient guidance for evaluating indicators of excessive trading such as turnover rates and cost-to-equity ratios. Additionally, the securities broker dealer’s surveillance was not capable of detecting excessive trading effectively.
The AWC stated that supervisors were not required to record the reasoning behind trades that exceeded specific turnover rate or cost-to-equity ratio amounts. The firm’s response to potentially excessive trading was limited to notifying compliance staff, who sent activity letters to customers without further action unless customers objected to the trading.
FINRA also stated that Western International Securities’ compliance staff did not use effective exception reports until 2019, and even then, these reports were not shared with supervisors. Activity letters sent to customers did not explain concerns and were not part of a larger system designed to investigate and address excessive trading. Consequently, the securities broker dealer’s procedures did not provide a reasonable basis to believe customers understood and accepted the risks of the active trading.
For instance, in 2018, Western International Securities sent a senior customer an activity letter asking for confirmation of agreement with the account’s active trading. The customer signed and returned the letter, leading the securities broker dealer to cease follow-up despite ongoing excessive trading that produced high turnover rates and cost-to-equity ratios.
As a result, Western failed to reasonably review potentially excessive trading in approximately 100 accounts.
Four Western International Securities stockbrokers engaged in excessive trading in several accounts. Specifically, in 2017 and 2018, a stockbroker excessively traded a senior customer’s accounts, resulting in a 30 percent cost-to-equity ratio and over $1,500,000.00 in trading costs and commissions. In 2018 and 2019, another stockbroker engaged in excessive trading in a senior customer’s accounts, leading to a 28 percent cost-to-equity ratio and over $750,000.00 in trading costs and commissions.
During 2018 and 2019, a third stockbroker conducted excessive trading in six customers’ accounts, producing high turnover rates and cost-to-equity ratios, with customers paying over $195,000.00 in trading costs and commissions. From 2016 to 2019, a fourth stockbroker excessively traded a customer’s account, resulting in a 54 percent cost-to-equity ratio and over $110,000.00 in trading costs and commissions.
Therefore, Western International Securities violated FINRA Rules 2010 and 3110. In addition to the censure and fine, Western has been ordered to pay restitution of $1,057,632.70 plus interest.
Public Disclosure also shows that in 2022, Western International Securities was fined $400,000.00 and ordered to pay $471,000.00 in restitution by FINRA because it failed to supervise the suitability of stockbrokers’ investment recommendations. According to the AWC, from 2013 to 2017, Western International Securities did not have adequate written procedures or supervisory systems to ensure compliance with suitability obligations related to recommendations of non-traded real estate investment trusts (non-traded REITs). FINRA also stated that between 2015 and 2022, the securities broker dealer failed to timely report about 45 customer disputes. Therefore, Western International Securities violated NASD Rule 3010 and FINRA Rules 2010, 1122, and 3110.
