The SEC announced Thursday that it has charged registered broker-dealer Western International Securities, Inc. and five of its registered representatives with violating Best Interest Obligation regulations (commonly referred to as Reg BI).
“They recommended L Bonds to at least seven particular customers without a reasonable basis to believe the bonds were in their customers’ best interests.”
Nancy Cole, Patrick Egan, Andy Gitipityapon, Steven Graham, and Thomas Swan allegedly recommended and sold an unrated, high-risk debt security known as L Bonds to retirees and other retail investors.
From July 2020 through April 2021, Western sold an aggregate of $13.3 million of L Bonds.
The SEC’s complaint alleges that Western and the brokers recommended and sold the bonds to retail customers, many of whom were on fixed incomes and had moderate risk tolerances.
The issuer, GWG Holdings, Inc., stated the L bonds were high risk, illiquid, and only suitable for customers with “substantial financial resources.”
‘Care and compliance obligations’
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. 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 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 Grewal, Director of the SEC’s Division of Enforcement, 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.”
“Reg BI is an essential tool for the protection of the best interests of retail investors,” added Regional Director Daniel Gregus. “Protecting retail investors is one of the fundamental duties of the SEC, and a top priority of the Chicago Regional Office.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
