Western International Securities, a California-based broker-dealer currently under acquisition by LPL Financial, has been ordered to pay over $1.5 million for failing to detect churning in 100 customer accounts. This large penalty, issued by the Financial Industry Regulatory Authority (FINRA) on Monday, underscores the importance of robust compliance systems in the financial industry.
The settlement includes a $475,000 fine and approximately $1.06 million in restitution to eight customers who were subjected to excessive commissions due to unsuitable trading activities. These actions occurred between January 2016 and December 2019, during which time four former brokers at Western generated over $2.5 million in total trading costs. The fees incurred on these accounts represented as much as 30% of their equity value, with a turnover rate of eight, well above FINRA’s typical threshold for identifying potentially excessive trading.
In one particularly egregious case, a former Western broker switched a senior customer’s account from a fee-based structure to brokerage, amassing $750,000 in commissions between 2018 and 2019. This amount represented 28% of the account’s value, signaling a violation of responsible trading practices. Another broker placed 3,200 trades in six customer accounts during the same period, leading to cost-to-equity ratios of an astonishing 55%.
FINRA’s investigation revealed that Western’s surveillance systems, until early 2019, were inadequate for detecting such excessive trading. The firm’s trade blotter-based surveillance did not incorporate key indicators like cost-to-equity ratios or turnover rates, which are crucial for identifying churning. Moreover, Western failed to provide its field supervisors with the necessary guidance for evaluating potentially excessive trading, nor did it require them to take reasonable steps to address the issue, such as documenting justifications for trades, following up with customers, or imposing heightened supervision on brokers.
Instead of proactive measures, Western’s compliance department relied on “negative consent” letters to inform customers about the trading activity in their accounts. These letters, which required no response from customers, meant that no further action was taken unless a customer explicitly objected after receiving the written notice. Eventually, Western introduced a requirement for customers to sign attestations confirming that their brokers’ trading was consistent with the activity reflected on monthly account statements. However, these letters failed to provide a clear explanation of the firm’s concerns, and the compliance department did not send them consistently, according to FINRA.
Western International Securities has a history of regulatory problems. Notably, the firm was home to disgraced advisor Dawn Bennett, who orchestrated a $20 million Ponzi scheme harming her clients. Bennett’s case led to a $325,000 fine for Western in 2020, as part of a settlement over Western’s supervisory failures. Also, between 2019 and 2022, Western agreed to four separate settlements related to supervisory lapses. In November 2022, the firm paid $871,000 to settle FINRA charges that it failed to detect a broker’s unsuitable sales of certain real estate investment trusts (REITs).
Western has been owned by the independent broker-dealer roll-up company, Atria Wealth Solutions, since May 2020. At the time of the acquisition, Western had 400 advisors overseeing $11 billion in assets.
The current settlement with FINRA was signed by Atria executive William P. Morrissey. A spokesperson for Western commented on the resolution, stating, “This resolution with FINRA concerns issues from many years ago, chiefly between 2016 and 2019, when Western was under different ownership. Western is pleased to have resolved this legacy matter.”
LPL Financial, a giant in the independent brokerage space, is in the process of purchasing Atria from private equity firm Lee Equity Partners in a deal valued at up to $1.04 billion. Atria’s 2,400 brokers, who manage $100 billion in assets—including those at Western—will be integrated into LPL’s operations once the acquisition is finalized, expected by the end of the year. A spokesperson for LPL did not immediately respond to a request for comment.
The repeated regulatory actions against Western highlight the crucial importance of stringent oversight and proactive compliance measures in the financial services industry. As regulatory bodies like FINRA continue to crack down on firms that fail to protect their clients, it is imperative for investors to remain vigilant and informed about the activities in their accounts.
Contact Reif Law Group, P.C. If You Are a Victim of Unsuitable Trading Practices
If you have been affected by unsuitable trading practices or believe that your account has been subject to excessive fees due to broker misconduct, it is essential to seek expert legal advice. At Reif Law Group, P.C., we focus on representing clients who have been wronged by their investment advisors and financial brokers. Our experienced legal team is dedicated to protecting your financial interests and ensuring that you receive the compensation you deserve.
We understand the complexities of financial regulations and are here to help you navigate the legal challenges that arise from broker misconduct. Whether you are concerned about the actions of a former broker at Western International Securities or have disputes with another financial institution, Reif Law Group, P.C. is here to provide the guidance and support you need.
Contact Reif Law Group, P.C. today to discuss your case and take the first step toward securing your financial future. Your investments should work for you, not against you. Let us help you hold those responsible for their actions.