SEC Reg BI case blames Atria subsidiary for alternative sales

The SEC’s first enforcement action involving wealth managers’ duty of care to clients under Best Interest regulations could trigger a lengthy legal proceeding and sound alarm bells across the industry.

Western International Securities, a subsidiary of Atria Wealth Solutions, is accused of selling $13.3 million worth of L Bonds products from struggling alternative asset manager GWG Holdings between July 2020 and April 2021 without having a “base reasonable” to believe that the investments were in the customers. best interests, according to the SEC. In a civil case filed June 15 in federal court in Los Angeles, the regulator charged Western International and five of its registered representatives with violating the 2-year Reg BI rule.

While this case tracks 42 small colonies regarding Reg BI’s procedural requirement to file and post “Client Relationship Summary” documents, these issues technically charged the firms with offenses under the Investment Advisers Act and the Investment Advisers Act. the stock exchange. The Western International case marks the SEC’s first direct action under the controversial rule, which subjects wealth managers selling alternative products like L Bonds to greater scrutiny of how they meet client needs. Investigators say the “high risk and illiquid investment” did not serve the best interests of Western International clients.

“These clients had moderate to conservative or moderate risk tolerance, investment goals that did not include speculation, limited investment experience, limited liquid net worth, and/or they were retired,” says the complaint. “The [reps] nevertheless recommended L Bonds to these seven clients without reasonable grounds to do so.

With state regulatorsthe SECOND himself and FINRA each reporting issues with some aspect of industry Reg BI compliance, wealth managers expressed concerns on the number of potential enforcement actions to be expected from SEC Chairman Gary Gensler under the Biden administration.

The Western International case shows how SEC enforcement staff are “expanding their view of investor protection through best interests,” according to Louis Straney of Arbitration Insight, a former regulator who serves as an expert witness. High yielding but illiquid investments often come with substantial risks based on issuers like GWG, which deposit for bankruptcy protection in April and whose L bonds have already been subject to a number arbitration case.

“It’s really not a space for amateurs. It’s certainly an area that could appeal to people in times of relatively low interest rates and questionable stock market returns,” Straney said, predicting that the next cases of regulators under Reg BI could take many forms. “There are a lot of areas to look at, but this is definitely the one that should be a priority.”

While the case against Western International could have been brought under the previous adequacy standard for brokerages before Reg BI or through other existing laws against false statements or omissions, it will remind managers wealth managers to “ensure they have policies and procedures in place” at their own firms, said Brian Rubin, director of the SEC, FINRA and securities enforcement practice securities of the law firm Eversheds Sutherland.

“Clearly the gloves are off and the SEC will enforce Reg BI, and I anticipate FINRA will as well,” Rubin said. “Going forward, we’ll see more cases in this space, and I think some of them will have more nuance.”

For its part, Western International denies the allegations of the SEC. Atria, backed by private equity, which owns half a dozen mid-sized wealth managers, bought Based in Pasadena, CA Western International as of May 2020. Western International had over 400 independent financial advisors with $13 billion in client assets at the time of the transaction.

“The Company takes the interests of its customers very seriously and believes that it has complied with Reg BI and available regulatory guidance during the relevant period,” spokesman Julian Arenzon said in a statement. “The firm intends to actively defend the claims of the SEC and will not provide additional comment on this ongoing litigation at this time.”

The enforcement action stems from an SEC review of the company. Western International had policies in place for alternatives like GWG’s L bonds, but they weren’t sufficient for Reg BI bonds, according to the SEC. The company generated $187,000 in commissions and fees on sales, according to investigators. The five representatives – Nancy Cole, Patrick Egan, Andy Gitipityapon, Steven Graham and Thomas Swan – received a total of $70,000, according to the complaint. The L bonds they sold were corporate bonds paying fixed interest rates between 5.5% and 8.5% over maturity periods of two to seven years, according to the SEC.

GWG has sold about $2 billion worth of L bonds since it began doing so in 2012, with volume of $453 million during the manager’s fourth product offering from June 2020, according to the DRY. Until 2018, GWG’s business model was simply to buy life insurance policies on the secondary market, according to the regulator. That year, she and another company called Beneficient Company Group, LP began a series of transactions that made Beneficient a subsidiary of GWG and changed its business to focus on “providing liquidity to asset owners alternatives and illiquid investments,” the SEC complaint states. . Besides the goodwill on its balance sheet, GWG’s “liabilities greatly exceed its assets”, according to the regulator.

Western International’s procedures let its customers down from this risk, according to investigators. The corporate compliance officer performed due diligence on the fourth product offering, but the subsequent report never reached representatives, supervisors, or even other members of the Western International compliance team. , according to the SEC. Additionally, the company has not imposed any restrictions on the sale of the L bonds, such as barring them to customers with certain risk profiles or investment objectives, the SEC said. The firm’s mandatory online training course on L bonds did not extend to representatives who had already taken it for previous offerings, despite the issuer’s business model changing since then, according to the regulator.

The SEC’s complaint includes descriptions of each of the seven clients who purchased L Bonds through Western International’s brokers. One was a 79-year-old former trucker, another was a 54-year-old restaurant server and a third was a 75-year-old retiree, according to the regulator.

“These Registered Representatives recommended L Bonds to retail clients despite insufficient and sometimes misguided understanding of the investment,” according to the document. “Each of the Registered Representative Defendants misunderstood material matters regarding GWG and the L Bonds. … Each of these matters was disclosed by GWG in the 2020 Prospectus and/or its public filings.

The regulator accused the five reps and Western International of breaching Reg BI’s duty of care to customers and the company of transgressing the rule’s compliance requirements for written policies and procedures that comply with the guidelines. Although the case makes no allegation regarding investment losses suffered by the firm’s clients, the SEC seeks restitution of “any unjust enrichment they received as a result of the misconduct” and the payment of civil penalties.