The Securities and Exchange Commission on Thursday levied its first Regulation Best Interest enforcement action by charging registered broker-dealer Western International Securities Inc. and five of its registered reps with violating Reg BI through L Bond sales.
The brokers — Nancy Cole, Patrick Egan, Andy Gitipityapon, Steven Graham and Thomas Swan — violated best-interest obligations when they recommended and sold an unrated, high-risk debt security known as L Bonds to retirees and other retail investors, the SEC said.
From July 2020 through April 2021, Western sold an aggregate of $13.3 million of L Bonds.
The SEC order seeks disgorgement of any unjust enrichment received by the defendants as a result of the misconduct alleged, together with prejudgment interest.
The SEC's complaint alleges that, between July 2020 and April 2021, Western and the brokers recommended and sold L Bonds to retail customers, "many of whom were on fixed incomes and had moderate risk tolerances, despite the issuer, GWG Holdings, Inc., stating the L bonds were high risk, illiquid, and only suitable for customers with substantial financial resources."
As the SEC explains, Reg BI requires that a broker, dealer, or associated person act in the best interest of a retail customer when making a recommendation of a securities transaction.
Firms comply with Reg BI's best-interest obligation only if they comply with four component obligations: the disclosure obligation, the care obligation, the conflict of interest obligation and the compliance obligation.
The registered reps allegedly failed to comply with Reg BI's care obligation both because they did not exercise reasonable diligence, care and skill to understand the risks, rewards and costs associated with L Bonds, and also because they recommended L Bonds to at least seven particular customers without a reasonable basis to believe the bonds were in their customers' best interests, the SEC said.
The complaint also alleges Western failed to comply with Reg BI's compliance obligation because it did not adequately establish, maintain and enforce written policies and procedures reasonably designed to achieve compliance with Reg BI.
The brokers recommended L Bonds to retail customers, "despite having an insufficient, and sometimes erroneous, understanding of the investment," the SEC said.
