Reps at firm that sold GWG bonds wanted more exposure to risky alts: B-D execs

Senior executives at IFP Securities, which caused a stir in the independent broker-dealer industry by breaking off a couple of years ago from LPL Financial, said that the Securities and Exchange Commission in May 2021 began its investigation of sales of GWG L Bonds, whose parent company declared bankruptcy in April.

The SEC was keenly focused on how GWG sales by advisers at IFP Securities, which has about 200 reps and financial advisers, were made under the relatively new industry rule of Regulation Best Interest, according to the executives, Bill Hamm, CEO of IFP Securities, and Keith Kessel, the firm's chief compliance officer. Moreover, IFP reps were itching to increase clients' exposure to other alternative investments, which typically have high commissions, including structured products.

On a video made last May but recently viewed by an InvestmentNews reporter, Hamm said that he was receiving questions from some advisers about alternative investments. More specifically, he was being asked why the firm approves or doesn't approve certain products, and about concentration limits, meaning the percentage of a client's portfolio that can be invested in such vehicles. Hamm added that he had repeatedly said that there was risk with alternative investments and concentration limits, according to the video.

Some states have various concentration limits regarding illiquid investments, including nontraded real estate investment trusts.

“Part of that risk has come home to roost this past week, and the SEC has come calling and asking questions about GWG bond sales and sales practices," Hamm said, adding that the SEC's inquiry focused on specific customer accounts.

Hamm did not return calls made to IFP Securities this week to comment. It's not clear how much in GWG bonds the firm's advisers sold. GWG Holdings issued $1.6 billion of L bonds, which are backed by life settlements, and more than 140 broker-dealers had agreements to sell the bonds. It's also not clear what, if anything, the bonds are worth.

“The incident Bill is referring to is really an inquiry that’s been sent out to a number of broker-dealers, IFP Securities included," Kessel, the compliance executive, said on the video. "It has to do with the fact that GWG has been identified as a company that warrants some level of regulatory scrutiny.”

“We like many responsible firms have policies around concentration limits," he said. "Some of our reps wanted to take concentration for alts up to 60% or 70%, at least in the structured product space. From a regulatory perspective, that would not be considered, at least in my experience, wise, in virtually every case, unless you have a client who is clearly speculative and has play money. But for most of us, it is certainly not.”

Regarding sales of GWG bonds at IFP Securities, the SEC's focus was on Regulation Best Interest, Kessel said on the video. The SEC's questions were about the firm's effort to evaluate the risk, features and appropriate target market in an investment that generates income and is speculative.

Hamm closed the discussion by saying that if an adviser had been selling GWG bonds, “don’t be alarmed.” The point of the video was to illustrate why the firm has concentration limits on such alternative investments, he said.