SEC Charges Broker-Dealer Lion Street Financial for Regulation Best Interest Violations

The Securities and Change Commission (SEC) has announced charges against Lion Street Financial, LLC, Texas Corridor, for violating the Reg BI. The case highlights significant failures in the recommendations for the signing of high-risk debt securities, known as L bonds, issued by GWG Holdings, Inc. Violations occurred between June 30, 2020 and April 20, 2021, reflecting the gaps in Lion Street’s adherence to Reg BI’s care, compliance and conflict of interest obligations.

According to the SEC Order, Lion Street recommended L Bonds to retail customers without understanding or reporting the potential risks, rewards and costs associated with these investments. The June 2020 GWG Prospect revealed that L Bond had a high level of risk, including total potential loss of investment, inequity and speculative characteristics. Despite these warnings and the fundamental changes to the GWG business model in 2018 and 2019, Lion Street did not reassess the appropriateness of recommending L obligations to clients, an essential requirement under the Reg BI care obligation.

The SEC found that Lion Street had also violated Reg BI by recommending L Bonds to six retail depositories whose financial profiles were incompatible with such speculative investments. These individuals were at or near retirement age and invested a significant portion of their net L bond value, exceeding Lion Street’s alternative investment guidelines. The SEC concluded that these recommendations were not in the best interest of customers, as Reg BI requires.

In addition, the SEC investigation revealed shortcomings in compliance and conflict of interest practices on Lion Street. The corridor has not established and implemented written policies and procedures to comply with the regulatory BI compliance obligation by June 30, 2020, the compliance deadline. Conflict of interest policies were updated only eight or nine months later, and even then they were not implemented. This led to Lion Street’s inability to properly identify, mitigate or disclose conflicts of interest related to its L Bond recommendations.

Without admitting or denying the findings, Lion Street has agreed to an agreement that includes an order to terminate and withdraw, censure, disgovernment of $14,899.55, damages in interest of $3,683.32 and a civil penalty of $135,000. The SEC highlighted its commitment to the robust application of Reg BI, which aims to protect retail investors by holding brokers accountable for not prioritizing customer interests. The ongoing investigation is being conducted by Laura K. Bennett and Brook Jackling DeVeas, under the supervision of David A. Becker, with the assistance of Eugene Hansen and James Carlson.

This implementation measure is an unstable reminder of the crucial importance of compliance with the regulatory IB in maintaining investor confidence and market integrity.