SEC Charges Broker-Dealer for Reg BI Violations
Commentary by Steven Lofchie
The SEC charged a broker-dealer and five of its principals for failing to conduct proper due diligence prior to recommending an investment, and failing to act in customers' best interests when recommending investments to retirees and other retail investors.
In the Complaint, the SEC alleged that the broker-dealer failed to exercise reasonable diligence and assess the risks associated with investing in unrated, high-risk bonds. It also alleged that the broker-dealer did not have a reasonable basis to believe that, for at least seven customers, the recommendations were in the best interests of the customer when evaluating their investment profiles.
As a result, the SEC alleged that the broker-dealer violated Rule 15l-1(a)(1) under the Exchange Act ("Regulation Best Interest").
The SEC seeks to impose a permanent injunction, disgorgement and prejudgment interest, as well as civil penalties.
Commentary
Historically, this enforcement action would have been brought by FINRA as a "suitability" violation of FINRA Rules. Now it is brought by the SEC as a violation of the Exchange Act. Potentially, charges under the Exchange Act are more serious; e.g., they are violations of law.