December 10, 2020
The Financial Industry Regulatory Authority (FINRA) Department of Enforcement recently approved a Letter of Acceptance, Waiver and Consent (AWC) submitted by Coastal Equities, Inc. (Coastal) to resolve alleged violations of securities industry rules for failing to supervise one of its registered representatives. Coastal is located in Wilmington, Delaware and has 104 registered representatives across 50 branch offices.
According to the AWC, Coastal failed to supervise a registered representative who was recommending excessive and unsuitable trading in four customers’ accounts as well as making unsuitable recommendations to purchase securities using margin in two customers’ accounts from September 2015 to July 2018. FINRA alleges that the Coastal representative’s supervisor had numerous signs or “red flags” of this activity through daily trade blotters.
In September 2016, the Coastal representative’s supervisor questioned his trading activity that alluded to excessive trading. When the representative explained that his customers approved of his trading strategy, Coastal accepted this explanation without further investigation into this or other trading activity. By October 2016, the daily trade blotter revealed that the representative was frequently trading in at least four customer accounts that resulted in high turnover rates and commissions. Turnover rates were 6 or greater and the cost-to-equity ratio was in excess of 20% in these customers’ accounts. This means the account would have to yield 20% returns just to break even.
Despite these and other red flags, Coastal continued to lag on its supervision over this representative. In 2018, the firm began sending activity letters directly to some of the representative’s customers and limited the commissions the representative could charge to his customers’ accounts. The Coastal representative continued to recommend excessive trading and/or unsuitable use of margin to certain customers until he left the firm in July 2018.
FINRA accepted the AWC on November 9, 2020. By signing the AWC, Coastal Equities, Inc. consented to a censure and restitution totaling $270,320, plus nearly $10,000 in interest.