Brokers violated “best interest” rules, SEC alleges

Selling risky illiquid bonds to retirees and other retail investors amounts to a violation of its new “best interest” rules, the U.S. Securities and Exchange Commission (SEC) is alleging.

In an enforcement case against a brokerage firm, Western International Securities Inc., and five of its reps, the SEC alleged that the firm and the brokers violated its new best interest rules (known as Reg BI), when they sold US$13.3-million worth of an unrated, high-risk debt security to clients.

In its complaint, the regulator alleged that the firm and brokers didn’t “exercise reasonable diligence, care and skill” when they recommended the bonds to retail clients “without a reasonable basis to believe the bonds were in their customers’ best interests.”

It also alleged that the firm didn’t have adequate policies to ensure compliance with Reg BI.

The allegations have not been proven.

“Reg BI is clear: broker-dealers must act in the best interest of their customers,” said Gurbir Grewal, director of the SEC’s enforcement division, in a release.

“When they fail to do so, as we allege happened here, they put retail investors at risk, and we’ll hold them accountable,” he said.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.