Articles Posted in Regulation Best Interest

The United States Securities Exchange Commission (SEC) recently issued a Staff Bulletin which discussed the use of sales contests or other sales incentives by FINRA Broker-Dealer firms in the context of SEC Regulation Best Interest (Reg BI).

Reg BI, 17 CFR 240-15l-1, specifically describes the “best interest” obligation as follows in section (a)(1):

“A broker, dealer, or a natural person who is an associated person of a broker or dealer, when making a recommendation of any securities transaction or investment strategy involving securities (including account recommendations) to a retail customer, shall act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the broker, dealer, or natural person who is an associated person of a broker or dealer making the recommendation ahead of the interest of the retail customer.”

The United States Securities and Exchange Commission (SEC) has filed a Complaint charging a Broker-Dealer for the first time with a violation of the recently enacted Regulation Best Interest (Reg BI).  The subject of the Complaint was Western International Securities, and five of its registered brokers, Nancy Cole, Patrick Egan, Andy Gitipityapon, Steven Graham, and Thomas Swan.

The Complaint alleges that Western and its brokers sold high risk and potentially illiquid L bonds issued by GWG Holdings, Inc., with many of the sales to customers on fixed incomes and with moderate risk tolerances.  The SEC’s press release alleged that the Defendants “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 SEC also claimed that the activities and sales violated the compliance component of Reg BI which requires firms to establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Reg BI.

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