SEC Finds That Some Broker-Dealers Are Using Outdated, Incomplete, and Inaccurate Risk Disclosures

On January 30, 2023, the United States Securities and Exchange Commission (“SEC”) published a Risk Alert including its observations from Broker-Dealer Examinations Related to Regulation Best Interest (“Reg BI”). The risk alert highlights deficiencies observed during regulatory examinations, as well as weak practices by broker-dealers that could result in deficiencies.

Reg BI requires that brokerage firms and brokers act in the best interest of a retail customer at the time of a recommendation to purchase, sell, or hold a security or investment strategy. The broker-dealer and broker must place their retail customers’ interest ahead of their own financial interest. The standard of care also applies to recommendations of account types.

Reg BI requires compliance with four component obligations:

Disclosure Obligation: Firms and brokers are required to provide certain disclosures before or at the time of the recommendation about the recommendation and the relationship between the retail customer and the broker-dealer.
Care Obligation: Firms and brokers are required to exercise reasonable diligence, care, and skill in making a recommendation, including understanding the potential risks, rewards, and costs associated with a recommendation and having a reasonable basis to believe that the recommendation is in the best interest of a retail customer.
Conflict of Interest Obligation: Broker-dealers are required to establish, maintain, and enforce written policies and procedures reasonably designed to identify and address conflicts of interest.
Compliance Obligation: Broker-dealers are required to establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Regulation Best Interest.

SEC Warns Broker-Dealers That Policies and Procedures Must Be Specific When Outdated Disclosures Need to be Updated

In connection with conducting regulatory examinations of broker-dealers, the SEC observed that some broker-dealers did not have written policies and procedures reasonably designed to achieve compliance with the Disclosure Obligation. Specifically, the SEC noted that some brokerage firms’ written policies and procedures did not specify when disclosures should be created or updated (i.e., when the disclosures contain materially outdated, incomplete, or inaccurate information) or how the updated disclosures should be delivered. For example, according to the SEC’s risk alert, some policies and procedures did not identify the parties responsible for creating or updating disclosures, how to identify that material changes have occurred, or when material changes should result in new or updated disclosures.

In practice, while representing investors who have been harmed by the conduct of broker-dealers, our law firm has observed the same failures by brokerage firms. Most recently, we have observed that many broker-dealers maintained and used outdated risk disclosure materials when recommending GWG L Bonds after GWG Holdings Inc., the issuer of the bonds, completely changed its business model in 2018. As a result, brokers were recommending, and customers were purchasing bonds based on outdated, incomplete, and inaccurate information.

Had the brokerage firms’ policies and procedures specified when the GWG L Bond disclosures should have been updated, how the updated disclosures should have been delivered, and who was responsible for monitoring the security for material changes, customers would have been able to make informed decisions about whether they were willing to invest in the speculative, high-risk, illiquid, and unrated GWG L Bonds.

Instead, thousands of retail investors purchased billions of dollars of GWG L Bonds, following the recommendation of their financial advisors, and have suffered significant losses after GWG Holdings, Inc. defaulted on their debt obligations in January 2022 and filed for Chapter 11 bankruptcy in April 2022.

For the latest on Iorio Altamirano LLP’s investigation of GWG L Bonds, including a key event timeline, visit our firm’s investigation page: Iorio Altamirano LLP’s Investigation of GWG L Bonds.

GWG Bankruptcy Update: Questions Remain as to When, or If, GWG L Bond Investors Will Receive Future Distributions

GWG L Bond Investor Recovers Losses After Filing a FINRA Arbitration Claim

Brokerage Firm Liability

An L bond is a financial product created by GWG Holdings, Inc. (GWGH). The L Bonds are speculative, high-risk, illiquid, and unrated alternative investment offerings.

Initially, GWG Holdings pooled money from bond investors to purchase life insurance policies on the secondary market, paid the policy premiums, and then collected the death benefit when the insured individual passed away. However, beginning in 2018, GWG Holdings used the investor capital to invest in a new business model, exposing the company to riskier alternative assets. Many GWG L Bond investors were utterly unaware that GWG materially reoriented its business model, which, in our view, made it a much bigger credit risk. Additionally, many GWG L bond investors were not told by their financial advisors that GWG used investor capital to pay out the high distributions owed to other GWG L Bond investors in a Ponzi-like scheme.

GWG sold the L bonds through Emerson Equity LLC and a network of regional broker-dealers, who pitched the products to individual retail investors. The network of regional broker-dealers who sold L Bonds and shared in the selling commissions included the following firms, as well as other broker-dealers:

Centaurus Financial, Inc.
Great Point Capital LLC.
National Securities Corporation.
Western International Securities, Inc.
Aegis Capital, LLC.
Newbridge Securities Corporation.
Dempsey Lord Smith, LLC.
Coastal Equities, Inc.
International Assets Advisory, LLC.
Arete Wealth Management, LLC.
Capital Investment Group, Inc.
Lifemark Securities, Corp.
Westpark Capital, Inc.
Ausdal Financial Partners, Inc.
American Trust Investment Services, Inc.
Moloney Securities.
IFP Securities, LLC.
Center Street Securities.
Cabot Lodge Securities LLC.
Kingswood Capital Partners, LLC.
American Trust Investment Services, Inc.
SW Financial.
Paulson Investment Company LLC.
Ages Financial Services, LTD.
Independence Capital Co., Inc.
Landolt Securities, Inc.
Intervest International Equities Corporation.
Titan Securities.
NI Advisors.
JRL Capital Corporation.
The FIG Group, LLC.
M Stevens Securities, LLC.
TFS Securities, Inc.
Integrity Brokerage, LLC.
American Equity Investment Corporation.

Brokerage firms are required to make investment recommendations that are suitable and in the best interest of their customers. Brokerage firms and financial advisors must also disclose all material facts and risks of a security when making a recommendation. When a firm or advisor fails to meet these standards of conduct, they can be held liable for damages.

Firms and brokers must also conduct reasonable due diligence on products they offer before recommending them to any clients. There are serious concerns that some broker-dealers recommended GWG’s L Bonds to customers without first conducting sufficient due diligence on the GWG L bonds or GWGH.

Investors who purchased GWG L Bonds through a financial advisor are encouraged to contact Iorio Altamirano LLP (gwglawyer.com) for a free and confidential consultation and to review their legal rights. We can review and analyze potential claims and advise individuals of their legal rights without obligation or cost.

About Iorio Altamirano LLP

Iorio Altamirano LLP is a securities arbitration law firm located in New York, NY. We represent investors nationwide and vigorously pursue FINRA arbitration claims on behalf of investors to recover investment losses.

We have nearly 20 years of combined experience as securities arbitration lawyers and have helped investors recover investment losses in over 1,000 cases. Our firm will file a FINRA securities arbitration claim on your behalf on a contingency fee basis to try to recover your losses. If we do not obtain a recovery, you do not owe us a legal fee.

If you have invested in L Bonds offered by GWG Holdings, contact securities arbitration lawyers August Iorio at august@ia-law.com or Jorge Altamirano at jorge@ia-law.com. Alternatively, call the firm toll-free at (855) 430-4010.