Most investors believe their broker and broker-dealer have their best interests in mind when making recommendations. As we’ve reported many times in this blog, that’s not always the case. The SEC’s newest rule, called Regulation Best Interest, nicknamed Reg BI, is the latest in the effort to make the market a safe place for investors. Now, Reg BI has led to its first enforcement action.
Silver Law Group represents investors in claims against selling broker-dealers for losses relating to GWG L Bonds and violations of Regulation Best Interest and other FINRA rules and regulations.
Regulation Best Interest
This regulation was established as Rule 15l-1(a) of the Securities Exchange Act of 1934. It requires broker-dealers to provide a customer relationship summary, or Form CRS, to each of their retail investment customers. This new regulation went into effect on June 30, 2020.
Reg BI establishes a baseline for conduct for both broker-dealers and all associated persons that is of the customer’s “best interest.” It encompasses both recommendations for potential investments as well as the types of accounts a customer might open. The intent is to “enhance the quality and transparency of retail investors’ relationships with investment advisers and broker-dealers.”
At its core, Regulation Best Interest requires broker-dealers to consider and act in the best interest of their customers when making recommendations. This includes transactions involving securities, investment strategies that includes securities, and types of accounts a customer might consider opening. The regulation consists of four components of obligation:
- Conflict of Interest
No longer is “suitable” a sufficient standard. Everything must be in the best interest of the client. The regulation requires that a broker-dealer may not put its own financial interests ahead of those of their retail customers when making any type of recommendations.
Western International Securities And GWG Holdings’ L Bonds
This is another topic about which we’ve published multiple blogs. Many investors are still not sure how much or even if they will see any of their money again. Reg BI means that going forward, more of these types of cases should be curtailed. Reg BI puts responsibility of paying attention directly on the broker-dealers who sell speculative and alternative illiquid securities to unsuspecting or unsuitable customers.
During GWG’s brief heyday, Western was one of the many associated broker-dealers that recommended the company’s now-defunct and illiquid L Bonds to their customers. Western sold $13.3 million worth of L Bonds from July 2020 through April 2021. However, not all the brokers selling L Bonds read the entire prospectus, including the fine print.
The SEC filed its enforcement action against Western International Securities and five of its brokers in June of 2022. In the complaint for SEC v. Western International Securities, Inc., 2:22-cv-04119, the SEC alleges they violated the “best interest” rule. The five brokers recommended the L Bonds to retail customers despite their illiquid nature and the description in the company’s prospectus as “high risk.” Because of their high risk and illiquid nature, L Bonds were not suitable for individual retail customers.
Additionally, the complaint states, the customers’ investor profiles to whom the product was suggested did not align with the risky and speculative nature of the L Bonds. Most of the customers had moderate to conservative risk tolerances and were not interested in speculative securities. Many were retired and had limited investment experience and a limited liquid net worth.
The complaint continues that the brokers violated the Care Obligation of Reg BI when they did not examine their customers’ investment profile and objectives. They failed to exercise due diligence with the L Bonds and failed to understand the risks. The brokers still recommended them to their customers without any reason to believe that the L Bonds were in the customer’s best interests.
For the Compliance obligation, Western used an outdated compliance manual and did not modify its compliance to be in line with Reg BI. The firm also failed to provide guidance to its brokers in line with the new regulations as well as institute its own internal processes to align with the new regulations.
While Western denies any wrongdoing, the SEC in its complaint seeks permanent injunctions, disgorgement and prejudgment interest, as well as civil penalties against both Western and the involved broker-dealers.
Did You Invest With GWG Holdings Or Western International Securities?
Silver Law Group represents investors in securities and investment fraud cases. Our lawyers are admitted to practice in New York and Florida and represent investors nationwide to help recover investment losses due to stockbroker misconduct. If you have any questions about how your account has been handled, call to speak with an experienced securities attorney. Most cases are handled on a contingent fee basis, meaning that you won’t owe us until we recover your money for you. Contact us today at (800) 975-4345 and let us know how we can help.