On August 11, 2025, the U.S. Securities and Exchange Commission (SEC) brought two settled administrative proceedings against a broker-dealer and one of its registered representatives for violations of Regulation Best Interest (Reg BI). Reg BI generally requires a broker-dealer, when making a recommendation of a securities transaction to a retail customer, to act in the retail customer’s best interest. These cases mark the latest in a series of Reg BI enforcement actions, and they highlight the need for broker-dealers to ensure that their policies and practices comply with the various obligations imposed by Reg BI.

The Case Against the Broker-Dealer

In Emerson Equity, LLC, Exchange Act Release No. 103674 (Aug. 11, 2025), the SEC brought an action against Emerson Equity, a dually registered broker-dealer and investment adviser, for failing to meet its care and compliance obligations under Reg BI. These failures occurred in connection with recommendations made to retail customers to purchase so-called “L Bonds” issued by GWG Holdings, Inc. (GWG), a publicly traded company.

Emerson Equity sold securities, including L Bonds, to retail customers. GWG’s prospectus for those bonds disclosed various risks, including that (a) the bonds involved a “high degree of risk, including the risk of losing [one’s] entire investment;” (b) investing in L Bonds “may be considered speculative;” and (c) L Bonds were “only suitable for persons with substantial financial resources and … no need for liquidity in this investment.” Id. at 3.

Despite those risks, during the relevant period, Emerson Equity’s registered representative recommended L Bonds to 10 retail customers. But, according to the SEC’s order, Emerson Equity “did not have a reasonable basis to believe that the L Bonds were in the customers’ best interest.” Id. at 5. This was because the “totality of these retail customers’ circumstances” – including their ages, incomes, liquid net worth, and concentration of net worth in L Bonds – “were a mismatch for high-risk, potentially speculative, illiquid investments such as L Bonds.” Id. Specifically, most of the customers “were at or near retirement age, and they invested between 16% and 72% of their liquid net worth in L Bonds” based on recommendations from Emerson Equity. Id.

Additionally, in connection with the purchase of L Bonds, Emerson Equity required its customers to complete an Investor Suitability Questionnaire and a Subscription Agreement. The company’s “general practice” was for a registered representative to review these forms with customers, complete the forms on the customers’ behalf, and then send the forms to the customers for their signature. Id. at 4. The Investor Suitability Questionnaires for the customers at issue included a statement that the customers had at least 10 years of investment experience in various asset classes, including options/derivatives, venture capital, and commodities. According to the SEC, however, that statement “did not accurately represent the actual investment experience” of the customers. Id. at 5.

In January 2022, GWG began missing payments on the bonds. And in April 2022, GWG filed for bankruptcy. Id. at 4.

The Obligations Imposed by Reg BI

Reg BI imposes several requirements on broker-dealers and their associated persons. See 17 C.F.R. § 240.15l-1. The “General Obligation” requires that, when recommending a securities transaction to a retail customer, a broker-dealer and its associated persons “shall act in the best interest of the retail customer at the time the recommendation is made,” without placing any financial or other interest of the broker-dealer or its associated person ahead of the retail customer’s interest. Emerson Equity at 2 (quoting 17 C.F.R. § 240.15l-1(a)(1)).

A broker-dealer satisfies the General Obligation “only if” it complies with four component obligations. Id. First, for the “Disclosure Obligation,” the broker-dealer must provide certain disclosures, in writing, before or at the time of the recommendation, about the recommendation and the relationship between the retail customer and the broker-dealer. Second, for the “Care Obligation,” the broker-dealer must exercise reasonable diligence, care, and skill in making the recommendation. Third, for the “Conflict of Interest Obligation,” the broker-dealer must establish, maintain, and enforce policies and procedures reasonably designed to identify and address conflicts of interest. Fourth, for the “Compliance Obligation,” a broker-dealer must establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Reg BI. Id. (citing 17 C.F.R. § 240.15l-1(a)(2)). Because all of these component obligations are “mandatory,” the failure to comply with any of them violates Reg BI. Id.

The Sanctions for Violating Reg BI

The SEC found that Emerson Equity violated Reg BI’s Care Obligation when it recommended L Bonds to 10 retail customers “without exercising reasonable diligence, care, and skill to have a reasonable basis to believe the recommendations were in the best interest of each particular customer.” Id.

The SEC also found that Emerson Equity violated Reg BI’s Compliance Obligation when it failed to establish, maintain, and enforce written policies and procedures to achieve compliance with Reg BI. Id. at 3. According to the SEC, although Emerson Equity adopted written policies and procedures to comply with Reg BI, those policies and procedures were not sufficient because they contained “only general recitations” of Reg BI’s obligations but did not provide specific “guidance or procedures” for registered representatives and supervisors to follow. Id. at 5-6. As an example, the SEC noted that Emerson Equity’s policies and procedures related to the Care Obligation did not provide guidance on “how to evaluate retail customers’ investment profiles.” Id. at 6.

For these violations, the SEC issued a cease-and-desist order, a censure, disgorgement and prejudgment interest of more than $5,000, and a civil money penalty of $100,000. Id.

The Case Against the Registered Representative

The SEC also brought a separate action, Tony Barouti, Exchange Act Release No. 103675 (Aug. 11, 2025), against the registered representative who made the recommendations above.

The SEC found that the registered representative violated Reg BI’s Care Obligation when he recommended L Bonds to 10 retail customers “without exercising reasonable diligence, care, and skill to have a reasonable basis to believe the recommendation was in the best interest of each particular customer based on that retail customer’s investment profile and the potential risks, rewards, and costs associated with the recommendation.” Id. at 2.

Accordingly, the SEC issued a cease-and-desist order, a censure, disgorgement and prejudgment interest of more than $62,000, and a civil money penalty of $50,000. Id. at 6.

The SEC’s Recent Focus on Reg BI

Including the cases above, the SEC has brought at least three Reg BI enforcement actions in 2025 based on recommendations to purchase L Bonds. In February 2025, the SEC brought a settled administrative proceeding against Centaurus Financial, Inc., a dually registered broker-dealer and investment adviser, and four of its registered representatives. See Centaurus Financial, Inc., Exchange Act Release No. 102379 (Feb. 7, 2025).

The SEC found that Centaurus Financial and its registered representatives violated Reg BI’s Care Obligation when they recommended L Bonds to 18 retail customers without a “reasonable basis to believe that the recommendations were in those customers’ best interest based on those customers’ investment profiles and the potential risks, rewards, and costs” associated with the recommended bonds. Id. at 2.

The SEC also found that Centaurus Financial violated Reg BI’s Compliance Obligation because it did not enforce its own written policies and procedures related to training. Id. at 2. Centaurus Financial used a consultant to help create Reg BI policies and procedures and to provide training on Reg BI and L Bonds. Id. at 8-9. Although Centaurus Financial ostensibly required its registered representatives to take these training sessions, many did not, and yet Centaurus Financial did not impose any restrictions on them. Id. at 9. By not enforcing its own policies, Centaurus Financial violated Reg BI’s Compliance Obligation. Id.

Accordingly, the SEC issued a cease-and-desist order and censures, and Centaurus Financial and its registered representatives were ordered to pay disgorgement, prejudgment interest, and civil money penalties. Id. at 10.

Takeaways

The cases above highlight several points:

First, enforcement of Reg BI appears to be a priority for the SEC under Chairman Paul S. Atkins. And this focus seems consistent with other recent enforcement actions, outside the Reg BI context, aimed at protecting retail investors.

Second, in its Reg BI enforcement actions, the SEC has targeted both firms and individuals. Thus, broker-dealers and their registered representatives must ensure that they understand and satisfy Reg BI’s component obligations or risk the expense, distraction, and reputational harm associated with an enforcement action.

Third, the mere existence of written policies and procedures concerning Reg BI may not be sufficient. As illustrated above, the SEC will consider, among other things, (i) whether the policies and procedures provide sufficiently specific guidance for registered representatives and (ii) whether broker-dealers actually enforce their policies and procedures. Broker-dealers should therefore proactively assess their compliance policies and practices around Reg BI before the SEC comes knocking.