World Group Securities, Inc. ("WGS"), a registered broker-dealer since 2002, agreed to pay a $200K fine to settle SEC charges it failed to prevent or detect fraudulent conduct by certain RR's, and didn't have enough supervisors to adequately supervise a branch.  While World Group undertook efforts to add supervisors to, and remove RR's from, that office, it failed to do so in a reasonable period of time. 

That was unfortunate, because during that time period - 2006 through May 2007 - certain Pomona RR's made unsuitable investment recommendations to customers - i.e., use home equity to purchase variable universal life (VUL) insurance policies.  Fortunately, firm's remedial actions helped reduce sanctions, as noted below.  

    Branch Growth Spurt.   During 2005, the WGS Pomona branch grew significantly;  by June, the branch office manager (BOM) was supervising 62 RR's.  By April 2006, the branch had 185 pending and active RR's, but only 3 branch supervisors.  It later had about 225 pending and active RR's and still presumably only 3 branch supervisors.  WGS advised the branch to add additional supervisors, but the BOM failed to do so in a timely manner.

The problem had not been corrected as of May 2007, so firm replaced the BOM on 5/21/07 and undertook other measures to ensure an appropriate ratio of RR's to supervisors in that office. 

    Firm's Warnings, Restrictions.   All WSP's from 2004 to 2007 included the following language:  “A Field Representative may not recommend to a client that he take out a policy loan, home equity line of credit, or any other loan to pay for a securities purchase.”  The Transaction Guidelines in effect during that period contained multiple references to WGS’s prohibition on the use of home equity to purchase a securities product.  WGS's multiple "Supervisory and Compliance Alerts and Bulletins" emphasized and reminded RR's of its prohibition on the use of home equity to purchase a securities product. 

    Branch Faltering Supervision.   Among other things, the BOM was responsible for ensuring that RR's under his supervision were aware of WGS’s pos and procedures, including prohibitions.  But during this time period, the BOM allegedly failed to communicate those policies to the RR's;  nor did he have the required quarterly meetings to discuss WGS’s policies, transaction guidelines, or supervisory and compliance alerts and bulletins. 

Certain RR's in the Pomona branch stated that they weren't aware of the foregoing WGS policies - if you can believe them - and made unsuitable investment recommendations to customers, including recommendations to use home equity to purchase variable universal life insurance policies.  At least according to this document, the onus fell on branch management. 

    WGS’s Remedial Efforts, Additional Settlement Terms.   The firm's remedial acts included, but were not limited to, the following:  (i) enhanced disclosure on order tickets;  (ii) additional written guidance for RR's re: WGS’s prohibition on using home equity to purchase securities;  (iii) increased numbers of employees in the Business Review Department;  (iv) new exception reports detailing the number of RR's per supervisor per branch office;  (v) termination of program involving approval of mortgage-related outside business activities;  and, (vi) enhanced regional supervision with a focus on RR interviews, reviews, training, and audits.

In addition to the $200K fine, WGS agreed to certify, in writing, compliance with the undertaking set forth above - along with written evidence of compliance in the form of a narrative, that's supported by exhibits sufficient to demonstrate compliance.    [SEC's 34Act Release 63354, 11/22]