Enforcement actions are once again on the rise. The U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) are cracking down on violations of “Duty of Care” highlighting the importance of making sure your clients’ best interests are always top of mind.
Violations of duty of care include inadequate risk assessment, failure to conduct proper due diligence on recommended investments, conflicts of interest, inadequate account monitoring, and excessive trading.
Recently, Western International Securities, Inc. agreed to a settlement with FINRA for failing to put in place adequate supervisory protocols to monitor excessive trading. Their failure to do so resulted in the overextension of 100 accounts, totaling millions of dollars in losses for investors. The firm’s Written Supervisory Procedures Checklist (WSP) included requirements for supervisory oversight on active trading accounts to assess for excessive trading, however, the WSPs did not provide adequate guidelines to successfully detect such activities. This was in violation of FINRA Rule 3110—failing to implement supervisory systems—and Rule 2010—failing to adhere to honorable principles of trading. Western International Securities, Inc. was fined $475,000 and ordered to pay restitution of over $1 million to clients. In addition, the SEC filed allegations against the firm for violating similar regulations (Regulation Best Interest (Reg B1) and 15/-1(a)(1)) and failing to act in the best interest of their clients. The firm agreed to pay the SEC $265,000 in civil penalties, commissions, and interest, as well as disgorgement of commissions received from the trades, bringing the firm’s penalties to a total of $1.7 million.
In May 2024, the SEC settled charges against broker-dealer firm Key Investment Services for violating Regulation Best Interest. The firm allegedly advised their clients to transfer their securities from “Key Investment Services” to a new account in “Key Private Bank,” also owned by Key Investment Services, without disclosing potential conflicts of interest. The firm agreed to a civil penalty of $223,228, among other provisions.
Duty of Care
In terms of the Western International Securities case, the firm and its representatives were accused of violating their duty of care by:
- Failing to provide investment advice in the best interest of the client.
- Executing transactions that did not align with the clients’ trading persona, and which put the clients’ assets at risk.
- Failing to provide adequate supervisory protocols and procedures to oversee trading practices, which resulted in financial loss for the client.
Duty of Compliance
Broker-dealers are obligated to understand and implement FINRA’s requirements for adherence to Reg BI and a strong supervisory system. FINRA Rule 3110, also known as the “Supervision Rule,” requires that firms create and maintain protocols for supervision to ensure client care and compliance.
According to the allegations against Western International Securities, the firm adopted a supervisory procedures checklist but failed to provide guidelines or implement them.
Jacko Law Group remains alert to the disciplinary actions of the SEC and FINRA and how they may affect you. The regulatory agencies are focusing on potential violations of advisers’ duty of care and compliance, especially in regard to failing to implement internal policies and protocols.
If you have questions or would like to make sure your supervisory policies and protocols meet regulatory requirements, feel free to give us a call at 619.298.2880 or email [email protected].
