In the first case involving Reg BI violations, the SEC today charged registered broker-dealer Western International Securities Inc. and five of its registered reps with failing to meet it fiduciary obligations by recommending and selling unrated junk bonds to retirees and other retail investors.
The SEC’s complaint alleges that Western, based in Pasadena, Calif., and its brokers violated Reg Best-Interest regulations when recommending and selling $13.3 million of GWG Holdings so-called L bonds that were “high risk, illiquid, and only suitable for customers with substantial financial resources.”
This year, GWG defaulted on its bond interest and principal payments and filed for bankruptcy.
“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.”
Western Spokesman Julian Arenzon said, "The firm takes its clients' best interests very seriously and believes it complied with Reg BI and the regulatory guidance available during the pertinent time frame. The firm intends to actively defend the claims asserted by the SEC and will not provide additional comments at this time."
The registered reps charged in the case are Nancy Cole, Patrick Egan, Andy Gitipityapon, Steven Graham, and Thomas Swan, who along with the firm are charged with violating Reg BI’s care obligations.
The SEC said the obligation should have required the reps to “use reasonable diligence, care and skill to form a reasonable basis to believe L Bonds were in the best interests of particular retail customers to whom they were recommended."
The SEC also alleged 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.”
Although Western’s policies and procedures require its reps to consider reasonably available alternatives to investment recommendations and to provide an investment “rationale” on client disclosure forms, Western provided no guidance or instruction for doing so, the SEC alleged.
Although GWG’s 2020 prospectus explained that an investment in L bonds was suitable only for those “substantial financial resources,” Western neither provided guidance to reps, nor did its written supervisory procedures set any limits on who could invest in L Bonds, the SEC said.