A California-based company and five of its brokers have been charged by the Securities and Exchange Commission with violating Best Interest Obligations (Reg BI), according to Advisor Hub.
The SEC announced the action Thursday against registered broker-dealer Western International Securities, Inc. and five of its registered representatives, or brokers – Nancy Cole, Patrick Egan, Andy Gitipityapon, Steven Graham, and Thomas Swan.
Reg BI requires broker-dealers to act in the best interest of their retail customers when they make recommendations on a securities transaction or an investment strategy. According to the charges, Western International and the five brokers violated the regulation when they recommended and sold $13.3 million of L Bonds, an unrated debt security, from July 2020 to April 2021.
The issuer of the L Bonds, GWG Holdings, Inc., said they were high risk, not liquid and only suitable for clients who had substantial financial resources. Despite this, the SEC said the Western International brokers went ahead and sold the bonds to retail customers, many of whom were retirees on fixed incomes with a moderate tolerance for risk. According to the SEC’s complaint, filed in U.S. District Court for Central California, the defendants did not exercise reasonable diligence, care, and skill to understand the risks, rewards, and costs associated with L Bonds.
The report notes that this was one of the first substantive enforcement actions taken by the SEC involving Reg B1 under Chairman Gary Gensler, who testified before Congress last year that the commission would do what is necessary to enforce compliance with the regulation as it is written.
“Reg BI is clear: broker-dealers must act in the best interest of their customers,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “When they fail to do so, as we allege happened here, they put retail investors at risk and we’ll hold them accountable.”
The complaint added that Western International did not adhere to 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 SEC is seeking permanent injunctions against Western International and the five brokers, along with disgorgement, interest, and civil penalties.
A spokesman for Western International was quoted as saying the firm would actively defend itself against the allegations, adding that the firm believes it complied with Reg B1 during the timeframe in question.
The attorneys at Hyman Cotter PC include former senior attorneys at the SEC whose legal experience and industry knowledge make them uniquely qualified to provide counsel on securities regulatory, compliance and enforcement matters. If your firm is facing an investigation from a regulatory agency, please contact Hyman Cotter PC by calling 312-291-4600 or through our online contact form.
