Lessons from the Wind-Up of the SEC’s First Major ‘Care Obligation’ Reg BI Enforcement Action

In 2022, the SEC brought its first enforcement action centered on the alleged failure of a broker-dealer and its associated persons to comply with the Regulation Best Interest (“Reg BI”) “care obligation.” The SEC sought to use the case to impose a new standard of knowledge and education about investments upon investment professionals. The defendants fought back, notably securing victories in motions practice, prevailing over the government’s effort to strike affirmative defenses based on fair notice, vagueness, and due process. Along with some legal commentators, the defendants raised significant questions about the SEC’s claims, including whether Reg BI truly prohibited certain conduct cited in the complaint and whether Reg BI sufficiently articulates the specific requirements imposed by the obligations of reasonable diligence and care.Now that case, SEC v. Western International Securities, et al(No. 2:22-cv-04119 in the U.S. District Court for the Central District of California) has settled, and last week the Court entered a consent Final Judgment that includes a permanent injunction, disgorgement of “net profits gained as a result of conduct alleged in the Complaint,” and a civil penalty.  The dollar amounts are not overwhelming—$34,468 in disgorgement and a $160,000 civil penalty against the brokerage firm, and generally lesser amounts for…