Western International Securities, a Pasadena, Calif.-based independent broker-dealer acquired by Atria Wealth Solutions in 2020, has come under fire from both the SEC and Finra.

The SEC accused the firm of violating the Securities Exchange Act of 1934 when it sold high risk L bonds issued by GWG Holdings, a Dallas-based purveyor life-insurance debt instruments, which subsequently filed for bankruptcy in April this year. L bonds are unrated high-yield fixed income securities that finance the purchase of life insurance contracts.

Donald Cutler, a spokesperson for Western International, said, “Western is pleased to have resolved these matters. Western takes its regulatory obligations very seriously, including its obligation to comply with Regulation Best Interest.”

The firm accepted a consent agreement without admitting or denying guilt, an SEC press release said yesterday. Under the terms of the agreement, according to the filing, Western agreed to a civil penalty of $160,000 plus repayment of more than $34,000 in commissions and interest. In addition, five of its registered representatives agreed to pay $12,500 each in civil penalties, along with unspecified “disgorgement of all the commissions” received from the trades.

The settlement remains subject to court approval.

At the same time, Finra fined the broker-dealer for allegedly failing to monitor excessive trading activity. Western agreed to pay a fine of $475,000, along with some $1.1 million in restitution to clients, again without acknowledging or denying guilt, in a settlement.

According to the agreement, the firm has some 390 registered professionals across 100 branches. Finra alleged that it failed to maintain a supervisory system between 2013 and 2017 to oversee the suitability of recommendations of nontraded REITs. Moreover, the agreement states, between 2015 at 2022 it failed to report on about 45 customer complaints, arbitrations, and settlements.

Western also agreed to implement a better supervisory procedure, according to Finra.

Finra said it requires member firms to establish and maintain a “system to supervise the activities of each associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations,” the charges state. Member firms are further required to implement written procedures to supervise the types of business activities they engage in, and to investigate “red flags that suggest … misconduct.” They also have a duty of honor to ensure that recommended trades are suitable for every customer, the regulator said.

Such recommendations must have a “reasonable basis,” the Finra statement says, and take into consideration each client’s “investment profile.” But Western allegedly failed to do any of that multiple times over several years, Finra said.

From January 2016 to June 2020, according to Finra, Western allegedly failed to monitor compliance with suitability requirements that pertain to excessive trading. As a result, the regulator said, it failed to respond to trades that “appeared to be potentially excessive and unsuitable.” For instance, from January 2016 to December 2019, the legal documents say, four representatives serving nine customer accounts produced an average cost-to-equity ratio of 30%, causing those clients to pay $2.5 million in inappropriate trading costs.

The cost-to-equity ratio measures the amount an account must increase in value to cover commissions and other trading expenses, or the breakeven point where a customer may begin to see a return. An annualized cost-to-equity ratio above 20% indicates “excessive trading may have occurred,” said Finra.

The firm did not document the justification for recommending trades with excessive cost-to-equity ratios and did not alert clients to confirm that they understood the terms of the trades, Finra said.

This is not the first time that the firm consented to fines for such Finra charges. Between January 2011 and January 2017 it allegedly failed to adequately supervise whether customers who purchased shares of recommended mutual funds received the benefits of applicable sales-charge waivers. For that, it was ordered to pay $75,000 and provide remediation to customers. In July 2019, it did not dispute these allegations.

Then, in May 2020, the firm consented to Finra findings that it had failed to report bankruptcies and other judgments against 52 of its registered reps totaling more than $5.6 billion. For that, it was fined $325,000.

More recently, in January 2021, it acknowledged that in the fourth quarter of 2018 it entered a transaction for an options contract that resulted in customers holding positions in a security that exceeded required safeguards. For that instance, it was fined $20,000.

In all these cases, Finra charges, if the firm had had an adequate supervisory system, these violations would not have happened.