WestPark Capital, Inc., located in Los Angeles, California, has been censured and fined $27,500.00 by Financial Industry Regulatory Authority (FINRA) by consenting to findings that the firm failed to create and sustain adequate supervision of collateralized mortgage obligations and failed to enforce existing supervisory practices. Letter of Acceptance, Waiver and Consent, No. 2016051690101 (Dec. 22, 2017).
According to the AWC, the firm, by way of one of its stockbrokers, began making recommendations of collateralized debt obligations to customers in March of 2015. The AWC stated that between March of 2015 and March of 2016, a stockbroker made one hundred fifty-seven agency collateralized mortgage obligation purchase recommendations, which equated to $6,500,000.00 in proceeds having been utilized by eight elderly customers holding seventeen accounts through WestPark.
The AWC revealed that thirteen collateralized debt obligations that had been recommended were classified as inverse floaters containing a negative correlation with a one-month LIBOR index. Other collateralized mortgage obligations reportedly contained a fixed rate offering, planned amortization class, and support bonds. Evidently, sixteen collateralized debt obligations were sold by September of 2016, with the average obligation only having been held for four months on average.
The AWC stated that the firm did not undertake any steps to review collateralized debt obligation transactions which were recommended by the firm to ensure that they were approved by supervisory personnel. Additionally, the firm reportedly failed to provide the firm’s staff with an education of the collateralized debt obligations. Further, the firm’s written supervisory procedures neglected to reasonably detail that the firm must offer customers education materials prior to their purchase of the CMO investments according to FINRA Rule 2216.
Apparently, the firm’s written supervisory procedures failed to address the supervision, recommendations, risk factors, and suitability of collateralized debt obligations. Evidently, both the stockbroker and supervisory personnel concluded that the firm’s broad procedures governed collateralized debt obligations. The AWC also revealed that the compliance and supervisory personnel maintained inadequate understandings of how collateralized debt obligations work.
WestPark reportedly depended entirely upon the stockbrokers to ensure that the stockbrokers had an adequately foundation for concluding that collateralized debt obligations were appropriate for customers, or that the risks and features of the collateralized debt obligations were discussed. The AWC revealed that the stockbroker’s suitability determination was accepted by the firm even though the stockbroker was subject of a Securities and Exchange Commission (SEC) action which caused the stockbroker’s daily activities to be subject of the firm’s heightened supervision. Yet, the AWC stated that the firm only limited the stockbroker’s heightened supervision to general issues that the firm concluded did not apply to the stockbroker’s activities.
Consequently, FINRA concluded that the firm failed to set forth adequate supervisory supervision of collateralized debt obligations transactions to make sure that they complied with FINRA rules as well as securities laws and regulations. FINRA found that the firm’s conduct was violative of FINRA Rules 2010 and 3110(a). FINRA further found that the firm violated FINRA Rules 2010 and 2216 for failing to ensure that customers were provided educational materials concerning collateralized mortgage obligation investments.
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