Firm Violated Reg BI With Risky Options Strategy: SEC
What You Need to Know
A former Western Securities rep engaged in risky day trading of options.
The firm’s chief compliance officer raised concerns that the rep was potentially overtrading his clients’ accounts.
One client, a 78-year-old widow, lost $525,000 because of the risky trading.
The Securities and Exchange Commission has fined Western International Securities $140,000 for allowing a former rep to engage in risky day trading of options in several client accounts — which resulted in one 78-year-old widow losing $525,000.
According to the SEC’s order, Western — a dually registered firm acquired by Atria Wealth in April of 2020 — allowed the rep, Christopher Kennedy, to engage in the risky trading despite warnings from the firm’s chief compliance officer.
From July 2020 through July 2021 Kennedy, a then-registered rep at registered broker-dealer Western, employed a risky day trading strategy in the accounts of certain of his customers with a total of 19 brokerage accounts, which was “inappropriate and not in those customers’ best interests.”
The trading strategy involved the purchase and sale of options contracts and “was not in the best interest of these customers, several of whom had moderate to conservative risk profiles,” the SEC states.
The trading strategy also led to these clients “paying excessively large commissions to Kennedy and Western and high turnover and cost-to-equity ratios in their accounts,” the SEC said, with Western failing to enforce its policies and procedures designed to achieve compliance with Regulation Best Interest.
Western’s CCO “told Kennedy’s direct supervisor that he was concerned that Kennedy was potentially ‘overtrading’ his customers’ accounts and was concerned about the large customer losses and high commissions associated with Kennedy’s trading strategy,” the order states.
Kennedy, 55, is a resident of Simi Valley, California, and was associated with Western as an independent contractor registered representative from August 2017 until July 2019 and from November 2019 until August 2021.
Clients ‘Did Not Understand’ Trading Strategy
Several of Kennedy’s clients “had little, if any, prior trading experience in stocks, had no experience in trading option contracts, and did not understand his trading strategy,” the order states, and most of them had a moderate or conservative risk profile.
In several instances, “Kennedy permitted certain customers’ option contracts to expire worthless, hoping that it would ultimately rise in value before expiration,” it said.
