SEC Charges Broker-Dealer First Horizon With Reg BI Violations
The U.S. Securities and Exchange Commission charged registered broker-dealer First Horizon Advisors Inc. for failing to maintain and enforce policies and procedures reasonably designed to achieve compliance with Regulation Best Interest, or Reg BI. The charges relate to First Horizon’s recommendations of a type of derivative security called a structured note, which were recommended to retail customers. First Horizon agreed to pay a civil penalty of $325,000 to resolve the SEC’s charges.
First Horizon’s Reg BI policies and procedures applicable to structured note recommendations required its registered representatives to determine whether the customer’s investment profile met First Horizon’s requirements; to determine whether the resulting customer holdings would not exceed First Horizon’s concentration limit for that product type in the brokerage account; to submit to First Horizon customer-signed structured note disclosures; and to submit to First Horizon customer-signed letters when the customer liquidated holdings in certain products and used those funds to purchase a structured note.
The SEC’s order finds that First Horizon failed to comply with its Reg BI policies and procedures in multiple ways between July 1, 2020, and at least July 31, 2023. For example, in 2021, First Horizon migrated more than 5,000 customer brokerage accounts to its system from that of a broker-dealer – IberiaBank Corporation – with whom First Horizon had merged in July 2020. Because of incompatibilities in the two systems, First Horizon did not have the accurate customer information to review structured note recommendations for compliance with First Horizon’s Reg BI policies and procedures. According to the SEC, the registered representatives who joined First Horizon from the merging broker-dealer also did not have access to First Horizon’s exception reporting site to review structured notes transactions flagged as non-compliant, as required by First Horizon’s Reg BI policies and procedures.
In addition, for at least three years after the implementation of Reg BI in July 2020, First Horizon also did not maintain or enforce certain Reg BI policies and procedures applicable to structured note recommendations made by its new First Horizon and legacy First Horizon registered representatives, according to the SEC. For at least several hundred structured note recommendations, the principal review desk failed to comply with its Reg BI policies and procedures in effect at the time. For example, First Horizon failed to create exception reports, or First Horizon’s registered representatives failed to clear exceptions, within the times specified in First Horizon’s policies and procedures. Additionally, the SEC said after First Horizon’s Reg BI policies and procedures were revised to require the principal review desk to review structured note recommendations for compliance prior to purchase, First Horizon approved structured note recommendations for which a “switch letter” was not on file prior to execution.
“To help reduce the chance of retail customer harm, Reg BI requires broker-dealers to establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Reg BI as a whole,” said Osman Nawaz, chief of the SEC enforcement division’s complex financial instruments unit. “This action underscores that broker-dealers must ensure appropriate compliance around complex financial products and that it is not enough to simply have written policies; firms must also enforce them.”
The SEC’s order finds that First Horizon violated Reg BI’s Compliance Obligation. Without admitting or denying the SEC’s findings, First Horizon agreed to a cease-and-desist order, a censure, and the above-mentioned civil penalty.
Click here to visit AltsWire directory page.
