SEC Charges Maloney Securities Co. For Violating Regulation Best Interest

The Securities and Exchange Commission (SEC) has charged Maloney Securities Co. Inc. for breaking Regulation Best Interest (Reg BI). This rule aims to protect retail investors. The SEC found that Maloney Securities sold high-risk bonds from GWG Holdings Inc. without proper care. These actions took place from June 30, 2020, to January 15, 2022.

Maloney Securities is based near St. Louis and has 125 financial advisors. The firm agreed to pay $437,900 to settle the charges. This amount includes $58,700 in disgorgement, $8,200 in interest, and a $250,000 fine.

Three advisors from the firm also paid a total of $121,000 as part of the deal.

GWG Holdings, the company that issued the bonds, filed for bankruptcy in April 2022. Before that, it had sold nearly $1.6 billion in L Bonds through about 40 broker-dealers over ten years.

These bonds were risky investments, but Maloney Securities didn’t fully consider this when advising clients.

The SEC found that Maloney Securities failed to follow Reg BI rules. They didn’t do enough research on the bonds or think about how risky they were for their customers. This case shows how important it is for firms to put their clients’ interests first.

Neither Maloney Securities nor its advisors admitted wrongdoing in the settlement. This isn’t the first time the firm has faced issues. Earlier, it paid $268,000 related to problems with another high-risk investment.

The SEC’s action against Maloney Securities serves as a warning to other firms. It shows the need for careful consideration when recommending investments. The case highlights the ongoing challenge of protecting retail investors.

Key Takeaways

• The SEC charged Maloney Securities Co. Inc. for violating Regulation Best Interest when selling risky GWG Holdings L Bonds from June 30, 2020, to January 15, 2022.
• Maloney Securities agreed to pay $437,900 in total, including $316,900 from the firm and $121,000 from three financial advisors involved.
• GWG Holdings, which issued the L Bonds, filed for bankruptcy in April 2022 after losing $215 million in 2020 and warning about its future in November 2021.
• The SEC found that Maloney Securities lacked diligence in understanding the risks of L Bonds and made recommendations without a reasonable basis, violating Reg BI’s care obligation.
• This case highlights the importance of broker-dealers following Regulation Best Interest rules and thoroughly researching high-risk investments before recommending them to retail customers.

SEC Settlement with Maloney Securities Co. Inc.

The SEC settled charges with Maloney Securities Co. Inc. for breaking Regulation Best Interest. The firm sold risky bonds from GWG Holdings Inc. to customers without proper care.

Violation of Regulation Best Interest (Reg BI)

Maloney Securities Co. Inc. faced charges from the SEC for breaking Regulation Best Interest (Reg BI) rules. The firm and its advisors failed to protect retail customers when recommending high-risk L Bonds.

From June 30, 2020, to January 15, 2022, they pushed these risky investments without proper care. The SEC found that Maloney Securities lacked a solid basis for their advice.

Reg BI requires broker-dealers to put clients’ interests first. But Maloney Securities ignored this duty. They didn’t research the L Bonds well or grasp their risks. As a result, they gave poor advice to everyday investors.

This case shows how important it is for firms to follow Reg BI rules carefully.

Bonds issued by GWG Holdings Inc.

Moving from the violation of Regulation Best Interest, we turn to the bonds at the center of this case. GWG Holdings Inc. sold L Bonds through about 40 broker-dealers over the past ten years.

These bonds raised nearly $1.6 billion. GWG described the L Bonds as backed by life settlements. This made them seem secure, but they were actually high-risk investments.

GWG’s financial troubles became clear in late 2021. The company shared doubts about its future in November. By April 2022, GWG filed for bankruptcy. This left the value of L Bonds uncertain.

The Securities and Exchange Commission found that Maloney Securities failed to understand these risks. They kept recommending L Bonds without a solid basis, breaking their duty to put clients first.

Details of the Settlement

The SEC imposed a hefty fine on Maloney Securities Co. Inc. The company must pay $437,900 for breaking Regulation Best Interest rules.

Total settlement amount: $437,900

Maloney Securities Co. Inc. agreed to pay $437,900 to settle charges with the SEC. This sum includes $58,700 in disgorgement, $8,200 in interest, and a $250,000 civil penalty. The firm’s three advisors also contributed $121,000 to the settlement.

We cooperated fully with the SEC and are glad to have this matter resolved, said Ted Moloney, CEO of Maloney Securities.

The settlement stems from violations of Regulation Best Interest related to GWG Holdings’ L Bonds. The SEC found that Maloney Securities failed to exercise due diligence in understanding the risks of these high-risk investments before recommending them to clients.

Breakdown of settlement amount

The total settlement amount was divided among Maloney Securities and three financial advisors. Here’s a breakdown of the settlement:

The SEC charged Maloney Securities with the largest portion of the settlement. The company paid $316,900 in total. This sum included $58,700 in disgorgement, $8,200 in interest, and a $250,000 fine. The three financial advisors involved in the case also paid fines. Donald R. Hancock paid $58,300, David F. La Grange paid $35,700, and Laura B. Barnes paid $27,000. These fines reflect the SEC’s findings on each party’s role in violating Regulation Best Interest.

Background Information

Maloney Securities Co. Inc. is a broker-dealer firm with financial advisors. GWG Holdings, a company that sold L bonds, filed for bankruptcy in 2022.

Maloney Securities and its financial advisors

Maloney Securities, a suburban St. Louis firm, employs 125 financial advisors. Ted Moloney serves as the company’s President and COO. The firm recently faced SEC charges for violating Regulation Best Interest.

Three advisors – Donald R. Hancock, David F. La Grange, and Laura B. Barnes – were involved in the settlement. The SEC’s findings focused on the firm’s failure to meet compliance obligations and care standards when recommending high-risk investments.

Bankruptcy of GWG Holdings

GWG Holdings faced major financial troubles in recent years. The company lost $215 million in 2020 and changed its focus to selling risky L Bonds. These bonds offered high interest rates between 5.50% and 8.50%, with hefty commissions for sellers.

By November 2021, GWG warned it might not survive as a business. The company’s money problems finally led to bankruptcy in April 2022.

GWG’s collapse affected many investors and broker-dealers who sold their products. The SEC took notice of how these risky bonds were marketed and sold. This scrutiny led to investigations into firms like Maloney Securities for possible rule violations.

Sale of GWG L bonds by broker-dealers

Broker-dealers sold nearly $1.6 billion in GWG L Bonds to investors. These high-risk, unrated bonds were offered by about 40 different firms between July 2020 and January 2022. The Securities and Exchange Commission (SEC) took notice of these sales and filed complaints against several advisors involved.

Financial advisor Robert M. Vance stood out in this group. He sold $4.3 million worth of GWG L Bonds and earned around $200,000 in commissions. The SEC’s actions highlight the need for careful oversight in the sale of complex financial products.

This case shows the importance of following regulations like Reg BI to protect investors.

Statements from Maloney Securities and Financial Advisors

Maloney Securities and its advisors spoke out about the SEC settlement. They expressed relief and pledged to work with the SEC to resolve the matter.

Ted Moloney’s relief and cooperation with the SEC

Ted Moloney expressed relief after resolving the SEC’s concerns. He stressed the firm’s full cooperation throughout the investigation. This approach shows Maloney Securities’ commitment to addressing regulatory issues head-on.

The SEC often views such cooperation favorably in enforcement actions. By working closely with regulators, firms can demonstrate their willingness to improve compliance practices.

Amount paid by the three advisors involved in the settlement

Following Ted Moloney’s cooperation with the SEC, three financial advisors faced monetary penalties. Donald R. Hancock, David F. La Grange, and Laura B. Barnes paid $58,300, $35,700, and $27,000 respectively.

These fines totaled $121,000, forming part of the larger $437,900 settlement with Maloney Securities Co. Inc.

The SEC’s findings led to these penalties, but the advisors did not admit or deny the allegations. This case highlights the importance of complying with Regulation Best Interest (Reg BI) and understanding investment risks.

Financial professionals must exercise care and diligence when recommending securities to clients.

Responses from the advisors

Donald R. Hancock expressed relief about the settlement’s resolution. He stated his satisfaction with the outcome, showing a positive response to the SEC’s decision. In contrast, La Grange and Barnes remained silent on the matter.

They did not provide any comments when asked about the settlement. The three advisors involved paid a total of $121,000 as part of the agreement with the SEC. None of the advisors admitted or denied the findings in the case.

SEC’s Findings

The SEC found that Maloney Securities failed to meet Reg BI standards when selling high-risk L Bonds. Read on to learn more about the SEC’s findings and their impact on the company.

Failure to comply with Reg BI

Maloney Securities Co. Inc. failed to meet Regulation Best Interest (Reg BI) standards. From June 30, 2020, to January 15, 2022, the firm and its advisors made risky recommendations to retail customers without a solid basis.

They pushed high-risk L Bonds from GWG Holdings Inc. without proper care or research.

The Securities and Exchange Commission found that Maloney Securities lacked diligence in understanding the risks of these investments. They didn’t follow the care obligation required by Reg BI.

This led to unsuitable advice for their clients, putting customer interests at risk. The firm’s actions showed a clear violation of the rules meant to protect retail investors.

High-risk nature of L Bond investments

L Bonds carry significant risks for investors. The SEC classifies these bonds as high-risk investments with the potential for total loss. GWG Holdings marketed L Bonds despite their risky nature.

Disclosures warned investors about the chance of losing their entire investment. These bonds suit only those with substantial financial resources.

Broker-dealers sold about $1.6 billion in L Bonds to investors. This large sum highlights the scale of potential losses. The SEC’s findings show that many investors may not have fully understood the risks involved.

Financial advisors must carefully consider client suitability before recommending such high-risk products.

Disclosure from GWG Holdings

GWG Holdings made important disclosures about its financial health in November 2021. The company revealed doubts about its ability to continue operations. This came after GWG reported a $215 million loss in 2020.

The firm had shifted its business model to focus on issuing L Bonds, which offered high interest rates between 5.50% and 8.50%.

GWG’s L Bonds carried significant risks for investors. These bonds paid high commissions to brokers, ranging from 3.25% to 5%. Despite the attractive rates, GWG’s financial troubles led to its bankruptcy in April 2022.

This outcome highlighted the importance of thorough risk assessment in investment decisions.

Allegations Against Maloney Securities

The SEC claims Maloney Securities failed to do its homework on L Bonds. They say the firm pushed these risky investments without good reason.

Lack of diligence and care in understanding the risks

Maloney Securities failed to grasp the full scope of risks tied to L Bonds. They skipped crucial steps in their research process. This lack of care led to poor advice for customers.

The firm didn’t assess client profiles before making suggestions. As a result, they put investors at risk of losing all their money.

The SEC found that L Bonds were high-risk and speculative investments. Maloney Securities ignored these red flags. They didn’t do enough homework on the bonds’ dangers. This oversight broke rules set by Regulation Best Interest.

The firm’s actions showed a clear lack of diligence in protecting their clients’ interests.

Recommendations without a reasonable basis

The SEC found that Maloney Securities Co. Inc. made L Bond recommendations without a solid basis. These high-risk investments were pushed to retail customers without proper understanding of the risks and costs.

The firm’s financial advisors failed to grasp the complex nature of L Bonds before suggesting them to clients. This lack of due diligence led to recommendations that did not align with customers’ best interests.

Maloney Securities violated Regulation Best Interest’s Care Obligation by not fully assessing the L Bonds’ risks. The company’s advisors overlooked crucial details about these investments, including their high-risk profile.

This oversight resulted in unsuitable advice for many retail investors. The SEC’s action highlights the need for broker-dealers to thoroughly research products before recommending them to clients.

Conclusion

Maloney Securities’ case shows the need for firms to follow Reg BI rules. Investors must stay alert and ask questions about high-risk investments. Financial advisors should put clients’ interests first and fully understand products they recommend.

This settlement serves as a warning to other firms about the costs of non-compliance. Regulators continue to watch closely for violations in the financial industry. Investors can protect themselves by researching investments and working with trusted professionals.

FAQs

1. What is Regulation Best Interest (Reg BI)?

Reg BI is a rule set by the SEC to ensure broker-dealers act in their clients’ best interests when recommending securities or investment strategies.

2. How did Maloney Securities Co. violate Reg BI?

The SEC charged Maloney Securities Co. for failing to disclose conflicts of interest and not having proper written policies to comply with Reg BI’s disclosure obligation.

3. What are the potential consequences for Maloney Securities Co.?

Maloney Securities Co. may face civil penalties, restitution orders, and injunctions from the SEC. The firm might also need to update its compliance procedures.

4. How does Reg BI differ from the fiduciary standard for investment advisers?

Reg BI applies to broker-dealers, while the fiduciary standard under the Investment Advisers Act of 1940 governs investment advisers. Both aim to protect investors but have different specific requirements.

5. What role does FINRA play in enforcing Reg BI?

The Financial Industry Regulatory Authority (FINRA) works with the SEC to enforce Reg BI by examining broker-dealers and taking disciplinary action when necessary.

6. How can investors protect themselves from potential Reg BI violations?

Investors should ask about all fees, understand the risks of recommended investments, and ensure their broker-dealer provides clear disclosures about potential conflicts of interest.