Quick facts
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Western International Securities Fine Amount: $475 000 + $1,057,632 in customer restitution
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Date: 29 July 2024
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Violation Period: July 2016 - June 2020
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Primary Violation: Excessive Trading (Churning)
Western INTERNATIONAL Securities Fine Overview
FINRA has fined Western International Securities for failing to establish and maintain adequate supervisory systems to detect and prevent excessive trading in customer accounts between January 2016 and June 2020. The firm's inadequate supervision resulted in approximately 100 accounts experiencing potentially excessive trading activity, with some accounts showing cost-to-equity ratios as high as 55%.
Details of the Western International Securities Fine
The enforcement action highlighted several deficiencies in Western's compliance framework:
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No guidance was provided to supervisors for evaluating cost-to-equity ratios and turnover rates.
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Western International's trade blotter surveillance systems lacked integration of excessive trading indicators.
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There was no formal process for documenting justifications for high-frequency trading.
Worked Examples:
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Senior Customer Account (2017-2018).
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Activity: Hundreds of in-and-out trades.
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Cost-to-equity ratio: 30%.
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Financial Impact: Over $1.5 million in commissions and trading costs.
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Red Flag: High-frequency trading in senior account.
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Account Type Conversion Case (2018-2019).
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Activity: Changed from fee-based to commission-based account.
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Cost-to-equity ratio: 28%.
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Financial Impact: Over $750,000 in commissions and trading costs.
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Red Flag: Strategic account type change followed by excessive trading.
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Multi-Account Trading Pattern (2018-2019).
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Activity: Over 3,200 trades across six customer accounts.
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Highest cost-to-equity ratio: 55%.
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Highest turnover rate: Exceeded 22.
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Financial Impact: Over $195,000 in commissions and trading costs.
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Red Flag: Pattern of excessive trading across multiple accounts.
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Extended Excessive Trading (2016-2019).
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Activity: Sustained excessive trading in a single account.
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Cost-to-equity ratio: 54% (2019).
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Turnover rate: 12.
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Financial Impact: Over $110,000 in commissions and trading costs.
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Red Flag: Long-term pattern of excessive trading.
Western International SECURITIES Fines and Penalties
Select Quotes
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"An annualized cost-to-equity ratio above 20% and an annualized turnover rate of six or more are each an indication that excessive trading may have occurred."
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"The duty to supervise under Rule 3110 also includes the responsibility to reasonably investigate red flags that suggest that misconduct may be occurring and to act upon the results of such investigation."
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"Western's WSPs did not require supervisors to determine or document the factual justification for recommending trading in excess of specific cost-to-equity ratios or turnover rate thresholds, to contact customers by phone or in-person to confirm the suitability of even the most active trading, or to impose any discipline or heightened supervision on registered representatives in response to potentially excessive trading."
Sources
