First Western to Pay $200k Fine For Recommending Unsuitable Investment

First Western Capital Management (FWCM) to Pay $200k Fine For Recommending Unsuitable Investment

First Western Capital Management (FWCM) has been fined $200k by the US Securities and Exchange Commission for recommending investments to clients for seven years. The company is said to have invested over $666 million of clients’ money into securities they did not qualify for or qualified institutional buyers (QIBs). As a result of the wrongful investment, 81 clients received securities reserved for investors with at least $100 million in assets.

Between 2010 and 2017, the company has bought restricted securities and assigned them to 81 accounts that were not qualified, institutional buyers.

QIBs are only available to institutional investors and are worth at least $100 million. In addition, these types of investments generally need less regulatory protection. QIBs are complex and sophisticated investors, and some of them include high net worth individuals and entities. Entities can be;

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  • Savings and loan associations
  • Employee benefits
  • Investment companies
  • Insurance companies

According to the SEC, it is not hard to identify QIBs, but lack of training and proper supervision, many investment advisors, continue to violate laws pertaining to QIBs. SEC has accused FWCM or not giving proper training and supervision to its representatives who ended up selling restricted securities to individuals and trusts, individual retirement accounts, and small institutional accounts.

Unsuitable investment

An unsuitable investment is an investment that does not meet the investor’s needs and objectives. Financial advisors are required to ensure they recommend investments that meet the investor’s objectives and are in line with the Financial Industry Regulatory Authority (FINRA) regulations.

Investment advisors are mandated to act in the best interest of their clients. The advisor is required to recommend suitable investments and monitor the investor’s progress during the time the deal is operational. Investment companies must properly supervise their representatives to ensure they do not violate federal laws.

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The company incurs a cost in case their representatives recommend wrong investments or are negligent in monitoring clients’ investments.

To ensure they recommend suitable investment products, advisors consider the investor’s age, risk tolerance, investment experience, investment objectives, tax status, financial situation, and time horizon, among others.

Brokers are required to do research and conduct due diligence to ensure they recommend investments that meet their customers’ investment needs and objectives. They should adequately research an investment before recommending it to their clients.

FWCM Reports Q1 Financial Results

FWCM has announced financial results for Q2 2020 with net income amounting to $8.7 million or $1.10 per diluted share. The company reported $1.3 million or $0.17 per diluted share in net income in Q1 2020. In Q2 2019, the company reported $1.4 million or $0.18 per diluted share.

While commenting on the results, First Western CEO Scott C. Wylie said the record high income is a result of the company’s ability to manage through the COVID-19 pandemic. He said the company has a conservatively underwritten loan portfolio and is less exposed to industries that have been hard hit by the pandemic.

The company has tightened its credit underwriting and pricing an increased its loan level reviews. According to Wylie, the company has benefited from growing demand for mortgage refinancing. First Western also managed to reduce costs on deposits, which enabled it to maintain stable net interest margins.

During the quarter, the company reported significant milestones that strengthened its position. For instance, the company posted strong organic growth, recorded many PPP loans, and closed a number of acquisition deals. FWCM recorded 26.4% growth in net loans.

The CEO indicated the company continues to support its communities by offering more PPP loans. He noted that as of June 30, the company had $204.6 million in loans funded through PPP. This high productivity in PPP loans has helped the company drive substantial growth in loans and deposits. This has gone a long way in helping FWCM to scale up its operations, and realize improved operating efficiency.