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Regulatory Sanctions

Red Flags Indicate Speculative Purchases in Customer Accounts, But Firm Was Color Blind

August 4, 2017

by Howard Haykin


Based on FINRA’s account of this case, an argument could be made that gross negligence contributed to the supervisory failures at this firm. Over an 18-month period, senior management, compliance officers and branch supervisors enabled a broker to load customers’ brokerage and advisory accounts with unsuitable investments. Was "justice served?" Continue reading.


WFG Investments agreed to pay a $150K fine to settle FINRA charges that it failed to appropriately supervise the sales practices of a registered rep who engaged in unsuitable trading in the brokerage and advisory accounts of his customers.


BACKGROUND.    The Williams Financial Group is a privately held Dallas, TX-based financial services firm. It provides a range of advisory, brokerage and wealth management services to independent financial professionals. It’s wholly-owned B/D subsidiary, WFG Investments, has been a FINRA member firm since 1988. The firm conducts a general securities business and currently has around 237 registered individuals and 118 branch offices. Back in June 2012, the firm was cited for “inadequate supervisory systems and procedures to supervise all aspects of its securities business,” for which it paid a $40K fine.


FINRA FINDINGS.    For 18 months, between 1/1/12 and 6/20/13, one registered rep (‘MB’) in the San Antonio branch office engaged in extensive trading in unsuitable, low-priced securities in his customers' WFG (brokerage) and advisory accounts. The positions then morphed into undue concentrations in these same accounts.


  • In 2012, low-priced securities (<$5) accounted for 67% of all purchases in MB's advisory accounts and 66% of all purchases in his WFG accounts.
  • In 2013, low-priced securities rose to 80% of all purchases in MB's advisory accounts.
  • As a result, most of MB's customers held concentrated (80%) positions in 4 or 5 low-priced securities and/or illiquid and highly speculative private placement and REIT investments.
  • Customer financial situations, risk tolerances and/or investment objectives never seemed to matter in the investing activities of these accounts.


WFG Failed to Appropriately Supervise MB.   For most of the time, senior personnel at WFG were aware of MB’s unsuitable trading, yet they consistently failed to take adequate action to ensure that all such transactions were suitable. And, while they took some initial steps to address the noted problems, that was about as far as their actions went.


  • In August 2012, senior supervisory and compliance personnel met with WG, MB's direct supervisor. At the meeting in WFG headquarters, supervisor WG was instructed not to let MB or other representatives in the San Antonio branch purchase, on behalf of their clients, any more positions in a specific speculative, low-priced security. WG, however, failed to enforce this directive, and no one else from WFG headquarters took further action.


  • In September 2012, an inspection of the San Antonio branch was conducted by a compliance manager who had attended the August meeting. Yet, the scope of the inspection was limited to non-sales practices issues – e.g., change of address requests, controls over receipt of incoming mail. And, the inspection never addressed any of the issues brought up at the August meeting – i.e., (i) advisory activity by reps in this branch, including MB; (ii) trading in low-priced securities; or, (iii) suitability.


  • In January 2013, another meeting was held at WFG headquarters. There, senior supervisory and compliance personnel expressed their concerns to supervisor WG and to registered rep MB about MB’s unsuitable transactions and about undisclosed complaints against MB from his time with his previous employer. The CCO directed the following 2 follow-up actions:


►  WG, MB's direct supervisor, was ordered to contact MB's customers to ensure that they had approved of and understood the activity in their accounts. [NOTE: WG never followed through and no one from compliance ever followed up to ensure that customers were contacted.]


►  The compliance manager who conducted the branch inspection was told to draft a heightened supervision plan for MB, which he did and which he forwarded to WFG's compliance department. [NOTE: Nothing further happened and registered rep MB was never placed on heightened supervision during his tenure with the Firm.]


FINANCIALISH TAKE AWAYS.    Once again, we’re dealing with a case that involves egregious abuses of customer accounts – and where “red flags” were readily apparent to many persons in positions of authority. While everyone knew about the issues, no conclusive action was ever taken to resolve the matters at hand - for 18 months!


It’s difficult to imagine that the terms accountability, insight, follow-through, suitability, integrity had any significance to these persons of authority. 


I tried without success to determine if any individuals at WFG Investments were sanctioned for the supervisory failures noted in this case. And so I’ll limit this discussion to the firm-related sanctions.


Why didn’t FINRA ‘suspend’ WFG Investment, in addition to issuing a $150,000 fine? For example, FINRA could have prohibited the firm or certain of its branches from hiring any new registered reps for, say 6 months to a year. Such sanctions are commonplace for registered individuals, so why not for firms? [NOTE: This is a matter that deserves further attention, and will get it from Stay tuned.]


This case was reported in FINRA Disciplinary Actions for July 2017.

For details on this case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2015045755003.