SEC Charges Firm and Five Brokers with Violations of Reg BI
The Securities and Exchange Commission today charged 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 – with violating Best Interest Obligation regulations (commonly referred to as Regulation Best Interest or Reg BI) when they 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, 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 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” both because they did not exercise reasonable diligence, care, and skill to understand the risks, rewards, and costs associated with L Bonds, and also 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 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,” 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.”
“Reg BI is an essential tool for the protection of the best interests of retail investors,” said Regional Director, Daniel R. Gregus. “Protecting retail investors is one of the fundamental duties of the SEC, and a top priority of the Chicago Regional Office.”
The SEC’s investigation was conducted by Jonathan Epstein, Scott Tandy, Ariella Guardi, and Josh Wagoner and was supervised by C.J. Kerstetter and Paul Montoya, all from the SEC’s Chicago Regional Office. The litigation will be led by Ariella Guardi. EXAMS staff from the Chicago Regional Office conducted the examination that led to the investigation. The examination team included Stephen Bilezikjian, Craig Carlson, Tom Meier, Joseph Tholl, and Mike Wells.