The Securities and Exchange Commission (SEC) has charged registered broker-dealer Western International Securities and five of its brokers – Nancy Cole, Patrick Egan, Andy Gitipityapon, Steven Graham, and Thomas Swan – with violating best interest obligation regulations.
The best interest obligation rules are a standard of conduct for broker-dealers and advisers when they make a recommendation to a retail customer of any investment strategy involving securities.
The US regulator said the brokers “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 a total of $13.3m (£10.9m, €12.7m) of L Bonds.
The SEC alleges that, during the period, 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 issuer GWG Holdings stating the L Bonds were high risk, illiquid, and “only suitable for customers with substantial financial resources”.
The defendants allegedly “failed to comply” with rules around care obligation “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 added that Western failed to comply with the rules “because it did not adequately establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance”.
Gurbir Grewal, director of the SEC’s division of enforcement, said: “Broker-dealers must act in the best interest of their customers. When they fail to do so, as we allege happened here, they put retail investors at risk, and we’ll hold them accountable.”
