The Financial Industry Regulatory Authority (Finra) has taken significant action against a California broker, Linda J. Wimsatt. She sold speculative and illiquid GWG L bonds to four customers, despite these bonds not being suitable for them. This incident highlights the importance of regulatory compliance in the financial industry.

Regulatory Breach and Penalties

Finra suspended Wimsatt for four months and imposed a penalty of $31,000 plus interest. Over the past decade, about 40 broker-dealers sold nearly $1.6 billion in GWG L bonds. Currently, the value of these bonds is unknown, causing concern among executives and attorneys.Wimsatt sold the GWG bonds both before and after Regulation Best Interest (Reg BI) went into effect in June 2020. Finra claims she violated the suitability standard first and then Reg BI in these sales. Her recommendations to some customers were unsuitable based on their investment profiles, in violation of industry rules.In her settlement with Finra, she was fined $10,000 and ordered to pay restitution of nearly $21,000 plus interest. She has seven pending customer complaints related to GWG bonds.

GWG Holdings and the Bond Offering

GWG Holdings had a history of net losses and couldn't generate sufficient operating and investing cash flows to fund its operations. To finance its activities, GWG offered L Bonds to investors with different maturity periods and interest rates. These bonds were not directly secured by GWG's life insurance portfolio and were not rated by any bond rating agency.GWG sold L Bonds to retail investors in four separate offerings. Broker-dealers like WestPark, where Wimsatt was registered from November 2017 to October 2020, entered into agreements with GWG to sell these bonds. The offering documents for the third and fourth L Bond offerings stated that the bonds were speculative, involved high risk, were illiquid, and were only suitable for those with substantial financial resources and no need for liquidity.

The Impact on Customers

The customers who purchased these GWG L bonds faced significant risks. With no clear valuation, they could potentially lose a large portion of their investments. Wimsatt's actions in selling these unsuitable bonds raise questions about the responsibility of brokers in protecting their clients' interests.It is crucial for brokers to assess the suitability of investments for their clients based on their individual circumstances and investment goals. This case serves as a reminder of the importance of regulatory oversight in ensuring the integrity of the financial markets.

The Role of Broker-Dealers

Broker-dealers play a crucial role in the sale of securities. They are responsible for ensuring that the products they offer are suitable for their clients. In this case, WestPark Capital Inc. entered into an agreement with GWG to sell L Bonds and approved their sale by its brokers.However, the failure to properly assess the suitability of these bonds and the subsequent sales to unsuitable customers highlights the need for stricter oversight and compliance measures within the broker-dealer industry.