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SEC Takes First Substantive Reg BI Enforcement Action

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Article originally appeared on InvestmentNews

The Securities and Exchange Commission on Thursday took its first substantive enforcement action involving Regulation Best Interest when it charged a brokerage and five of its registered representatives with inappropriate sales of an unrated, risky debt security to retail customers.

The SEC filed a complaint in a U.S. District Court in the Central District of California against Western International Securities Inc. as well as brokers Nancy Cole, Patrick Egan, Andy Gitipityapon, Steven Graham and Thomas Swan.

The SEC alleged that between July 2020 and April 2021, the defendants recommended and sold approximately $13.3 million in corporate L Bonds. The brokers each received aggregate commissions of between $5,400 and $32,500, while the firm received approximately $187,000 in commission and fees.

The bonds, offered by GWG Holdings Inc., were “high risk, illiquid, and only suitable for customers with substantial financial resources,” the SEC complaint states. But the brokers sold the bonds to many customers who had moderate risk tolerances, little investment experience and limited liquid net worth, and were on fixed incomes or retired.

The SEC alleged that the brokers violated Reg BI, which prohibits them from putting their financial interests ahead of their customers’ interests. The agency said the brokers failed to meet Reg BI’s care obligation because they didn’t understand the risks and costs associated with the products and recommended them to customers without having a reasonable basis to believe they were in their customers’ best interests.

The SEC also alleged that the brokerage failed to satisfy Reg BI’s compliance obligation because it didn’t establish, maintain and enforce written policies and procedures to adhere to the measure.

The SEC is seeking an injunction, disgorgement, interest and civil penalties against the brokerage.

“Reg BI is clear: broker-dealers must act in the best interest of their customers,” SEC enforcement director Gurbir S. Grewal said in a statement. “When they fail to do so, as we allege happened here, they put retail investors at risk, and we’ll hold them accountable.”

Western International Securities maintains that it did nothing wrong and said it will fight the SEC’s charges.

“The firm takes its clients’ best interests very seriously and believes it complied with Reg BI and the regulatory guidance available during the pertinent timeframe,” Julian Arenzon, a spokesperson for Western International Securities, said in a statement. “The firm intends to actively defend the claims asserted by the SEC and will not provide additional comments on this pending litigation at this time.”

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Read more at InvestmentNews

Dan Moisand

 

Dan Moisand is a nationally recognized fiduciary fee-only financial planner, an Institute Real Fiduciary™ Advisor and Chair-elect of the CFP Board.

The Institute has enshrined the ‘Moisand Rule’ on fiduciary practices. It is basic and is more important today than ever: “You have to avoid conflicts. If I avoid a conflict, I don’t worry about it.”

Watch the video of Moisand speaking here.

Bob Veres

 

Bob Veres is a long term observer of financial planning. His Newsletter, “Inside information” Is a staple of leading planners. In the May edition he writes about fiduciary and the Institute.

"But a much bigger point is that the fiduciary standard—as Knut Rostad of the Institute for the Fiduciary Standard has pointed out—has been determined by the Supreme Court (1963 ruling) to be at the very heart of the Investment Advisers Act of 1940. It is the foundation of what it means to be an RIA registered with the SEC instead of a tipster or a tout."

- Bob Veres, Parting Thoughts ... The SEC's Own Compliance Culture