Brokerage Firm Charged by SEC for Violating Reg BI Standards
Brief Introduction
On June 16th, the SEC announced that they had charged a registered broker-dealer and five of its registered representatives for violating Reg BI in their recommendation and selling of $13.3 million of unrated, high-risk debt securities, known as L-Bonds, to retirees and other retail investors.
How Did The Issue Occur?
- Between July 2020 and April 2021, the broker-dealer and its representatives sold L Bonds to retail customers, many of whom were in the vulnerable position of relying on fixed incomes with moderate risk tolerances
- Even though the issuer of the L Bonds informed the broker-dealer of the high risk and illiquidity of the securities, the Broker Dealer and its representatives recommended the L Bonds to at least 7 customers without reasonable basis to believe the investment was in their best interest
- This action violates the Best Interest Obligation regulations, in that the defendants allegedly failed to exercise reasonable diligence, care, and skill to understand the risks and rewards associated with L bonds
- Additionally, the SEC complaint alleges that the Broker Dealer failed to comply with Reg BI’s “Compliance Obligation” because it did not have adequate written policies and procedures designed to achieve compliance with Reg BI
What Were The Findings And Final Conclusion?
- The SEC found that the broker-dealer violated the Best Interest Obligation regulations, specifically the obligations pertaining to care, disclosure, conflict of interest, and compliance
- Additionally, the SEC found that the broker-dealer failed to customize its Reg BI procedures to its business and did not properly train its registered representatives on the risks and rewards of the L Bond
- The SEC seeks disgorgement and prejudgment interest, permanent injunctions, and civil penalties against the broker dealer and its five registered representatives due to their violations of Rules 15I-(a)(1) under the Exchange Act
Vigilant’s Final Conclusion
As it relates to Reg BI, conflict of interest, disclosure(s), and compliance responsibilities, it is important to make sure your Firm’s procedures appropriately address those points.
If you are in need of assistance relating to Reg BI requirements, procedures, or understanding Reg BI compliance issues, contact us.
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