Compliance Corner: SEC Charges Firm, Reps With Violating Reg BI Rule

Editorial Staff June 21, 2022

Compliance Corner: SEC Charges Firm, Reps With Violating Reg BI Rule

The latest compliance news: regulatory developments, punishments, guidance, permissions and new product and service offerings.

Securities and Exchange Commission
The Securities and Exchange Commission has charged registered broker-dealer Western International Securities and five of its reps with violating the Regulation Best Interest rules now in force.

The watchdog has charged Nancy Cole, Patrick Egan, Andy Gitipityapon, Steven Graham, and Thomas Swan with breaking Reg BI when they recommended and sold an unrated, high-risk debt security known as L Bonds to retirees and other retail investors, it said in a statement late last week. 

From July 2020 through April 2021, Western sold a total of $13.3 million of L Bonds, it said. 

The SEC 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 that the L bonds were high risk, illiquid, and only suitable for customers with substantial financial resources. 

The defendants allegedly failed to comply with Reg BI’s “Care Obligation” because they did not exercise reasonable diligence, care, and skill to understand the risks, rewards, and costs associated with L Bonds, and 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 complaint also alleges that 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.

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

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