The U.S. Securities and Exchange Commission (SEC) is putting some muscle behind Regulation Best Interest (Reg BI). On June 16, 2022, nearly two years after Reg BI went into effect, the SEC filed its first federal lawsuit to enforce the rule against a broker-dealer and its registered representatives.
The SEC sued Western International Securities, Inc. (Western), a dually registered broker-dealer and investment advisor, along with five of its registered representatives, in the U.S. District Court for the Central District of California for allegedly violating Reg BI’s care obligation; the defendants allegedly recommended certain high-risk, speculative bonds to retail customers without themselves fully understanding the associated asset risks and without establishing how the investments served the customers’ best interests. The SEC also charged Western with violating its compliance obligation under Reg BI for allegedly failing to maintain adequate policies and procedures and other controls.
The fact that the SEC sued registered representatives — notwithstanding allegations that their firm had inadequate internal controls and policies — is a strong statement that individuals must use their best judgment to make their own independent inquiries and determinations about the products they recommend to their clients. Registered representatives cannot hide behind their firm’s guidance and control failures to escape primary liability under Reg BI.