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Regulatory Sanctions

Enablement: Financial West Broker Barred for Churning, ...

January 16, 2019

by Howard Haykin


Enablement: “the action of giving someone the authority or means to do something.”



In August 2017, FINRA barred a broker for recommending and executing hundreds of unsuitable Non-Traditional Exchange Traded Fund (“ETF”) transactions in customer accounts, yet that broker's firm, WPG Investments, got a “free pass” – i.e., it was never sanctioned for failure to supervise this “out-of-control” broker. In December 2018, FINRA reported a similar case - the subject of this case study.


My concern is this: how else could a broker ’churn and burn’ customer accounts for years without 'support' or “enablement” from the firm? After all, brokers don’t operate within a vacuum.



WHAT WENT WRONG.    FINRA barred a broker with Financial West Group for churning 5 customer accounts held by 2 customers (one being a senior) over a 27-month period (between August 2014 and November 2016). This broker excessively traded and unsuitably recommended non-traditional ETFs in all 5 accounts and, in case you're wondering, the broker sported 19 years’ experience, held a Series 24 license, and started with Financial West just 3 months earlier. 



How FINRA characterized the customers and their respective accounts:


In June 2014, Customer DW transferred her entire IRA with $60,000 in cash and securities to Financial West; JSS was assigned to her account. DW, who was 65 years old, married, retired and had limited investment experience, listed her investment objective as “preservation of capital with a conservative risk tolerance.”


In July 2014, Customer PN transferred 4 accounts to Financial West, including her company pension plan and profit sharing plan accounts and one individual account, totaling approximately $63,000 in assets; JSS was the assigned Rep. PN, who was 51 years old, a single parent, a self-employed business owner, and had no investment experience (other than JSS’s handling of 3 small brokerage accounts for her at his prior firms dating back to 2011) likewise listed her investment objective as “preservation of capital and accumulation of wealth with a moderate risk tolerance.”


How FINRA characterized JSS’s trading in the customers’ accounts.


  • JSS exercised de facto control over DW’s IRA account for 27 months; likewise, he exercised de facto control over PN’s accounts for 16 months.
  • JSS executed 97 trades in DW’s account, generating $40,000 in commissions and fees; JSS executed 170 trades in PN’s 4 accounts, generating $39,000 in commissions and fees.
  • DW ultimately sustained a complete loss of her retirement savings, while PN sustained total losses of $45,000.
  • JSS executed in-and-out trading in both accounts, such as repeatedly buying and selling over a short period of time the same three gold, mining and oil stocks (with holding periods ranging from 4 to 11 days).
  • JSS executed inverse and/or leveraged ETFs in both accounts, and inappropriately held those positions for multiple trading sessions (even though such investments are intended as daily trading vehicles).
    • 54 such trades in DW’s account, with some ETFs held for up to 97 days.
    • 78 such trades in PN’s accounts, with some ETFs held for up to 155 days.
  • DW’s account had an annualized turnover rate of 19.28; PN’s accounts had turnover rates ranging from 10.32 to 19.31.



FINANCIALISH TAKE AWAYS.    According to FINRA’s CRD records, Financial West Group was never sanctioned for its failure to adequately monitor for unsuitable recommendations in Non-Traditional ETFs by its registered reps. While it’s possible that FINRA sanctioned JSS’s direct supervisor for failure to adequately supervise his or her direct charges, it’s incumbent on the firm – and that firm’s chief compliance officer – to maintain internal controls and supervisory procedures for monitoring and detecting such violative conduct by its registered reps. That would include investigating suspect transactions noted in basic Exception Reports, typically furnished by the Clearing Broker.


If, as is frequently the case, FINRA offers little or no “wiggle room” when disciplining associated persons, why does FINRA refrain from applying the same criteria to other responsible parties - namely, firms - by holding them accountable for failure to supervise? 
Frankly, failure by FINRA’s to sanction firms for apparent failures to supervise is a disgrace and a black mark against the regulator.



This case was reported in FINRA Disciplinary Actions for December 2018.

For details the case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2017054755205.