SEC Hits Wisconsin BD With Reg BI Fine
The firm's policies and procedures contained Reg BI language but weren't tailored to its business, the SEC said.
The Securities and Exchange Commission said Friday that it has censured and fined a Wisconsin-based broker-dealer, Carl M. Hennig Inc., with failing to meet its compliance and conflict of interest obligations under Regulation Best Interest.
Henning was ordered to pay a $50,000 civil money penalty.
According to the SEC’s order, between June 30, 2020 and January 2023, Hennig’s written policies and procedures were not reasonably designed to achieve compliance with Reg BI.
The SEC said that Hennig’s written policies and procedures did not:
- Explain what factors or criteria should be considered and weighed when making recommendations or determining whether a particular recommendation is in the customer’s best interest
- Provide sufficient information regarding the information provided to customers, including the fees associated with Hennig’s retail brokerage services
- Address how and when Hennig would update and provide written disclosures to its customers.
In addition, Hennig’s written policies and procedures “did not explain how to identify conflicts of interest or how to disclose, mitigate, or eliminate them,” the SEC states.
Hennig adopted new written policies and procedures to comply with Reg BI on June 29, 2020, the last day before Reg BI’s compliance date.
While the written policies and procedures “contained some general language from the text of Reg BI,” they were not tailored to Hennig’s business, according to the SEC.
Further, the SEC said the policies and procedures “did not provide guidance or procedures for how Hennig’s registered representatives and supervisors could achieve compliance with Regulation BI and its component obligations, and did not include reasonably designed mechanisms for Hennig to enforce its Regulation BI policies and procedures.”
The order also states that from their adoption in June 2020 through January 2023, Hennig’s written policies and procedures related to the Conflict of Interest Obligation stated that Hennig “strive[s] to create a sales environment that is free of quotes, sales incentives, proprietary products or products with third-party arrangements, bonuses, and noncash compensation on the sale of specific types of securities to ensure that the client’s best interest is met.”
These written policies and procedures “failed to adequately address Hennig’s Conflict of Interest Obligation because, among other things, they did not provide any guidance or procedures for how the firm was to achieve those goals,” the SEC said.
In January 2021, after an examination by the Financial Industry Regulatory Authority, FINRA requested that Hennig take action to update and correct its written policies and procedures related to Reg BI.
When the SEC’s Division of Examinations examined Hennig in June 2021, “Hennig had not yet taken action sufficient to bring its written policies and procedures” into compliance with Reg BI, the order states.
As a result, in May 2022, the SEC issued a deficiency letter to Hennig noting that Hennig’s written policies and procedures still failed to comply with Reg BI.
In January 2023, Hennig adopted new written policies and procedures related to Reg BI, including written policies and procedures related to its conflict of interest obligation, disclosure obligation, and care bligation.
Form CRS Failures
From their adoption in June 2020 through January 2023, Hennig’s written policies and procedures related to its Disclosure Obligation stated that Hennig’s Form CRS would “address all available services Hennig offers through its brokerage accounts and advisory platforms and the fees associated with both.”
The order states that Hennig further disclosed in its Form CRS that the “primary fees” paid by the customers for brokerage services are “transaction-based fees … typically called commissions, sales charges, loads, selling concessions, or trails.”
However, “Hennig’s written policies and procedures were not reasonably designed to provide additional information beyond that discussed in its Form CRS to its customers,” the SEC said.