SEC Cracks Down on First Horizon for Regulation Best Interest Violations

The Securities and Exchange Commission (SEC) has taken action against First Horizon Advisors, Inc., a registered broker-dealer, for failing to comply with Regulation Best Interest (Reg BI). The charges, announced on September 18, 2024, specifically relate to First Horizon's recommendations of structured notes, a type of complex derivative security.

In a settlement reached with the SEC, First Horizon has agreed to pay a civil penalty of $325,000 without admitting or denying the findings.

The SEC's investigation revealed multiple compliance failures by First Horizon, particularly in the wake of a merger that brought significant challenges:

1. System Incompatibility: Following a merger in 2021, First Horizon migrated over 5,000 customer brokerage accounts to its system. Due to incompatibilities between the systems, the firm lacked accurate customer information necessary to review structured note recommendations for Reg BI compliance.
2. Access Issues: Registered representatives who joined First Horizon from the merging broker-dealer were unable to access First Horizon's exception reporting site. This site was crucial for reviewing structured notes transactions flagged as non-compliant, a requirement under First Horizon's Reg BI policies.
3. Documentation Failures: In 2023, the firm approved structured note recommendations without all the documentation required by its own Reg BI policies and procedures.

Osman Nawaz, Chief of the SEC Enforcement Division's Complex Financial Instruments Unit, emphasized the importance of this action: "This action underscores that broker-dealers must ensure appropriate compliance around complex financial products and that it is not enough to simply have written policies; firms must also enforce them."

The SEC's order finds that First Horizon violated Reg BI's Compliance Obligation, which requires broker-dealers to establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Reg BI as a whole.

This enforcement action serves as a stark reminder to broker-dealers of the SEC's commitment to protecting retail investors, especially when it comes to complex financial products. It highlights the need for firms to not only have robust compliance policies in place but also to ensure these policies are effectively implemented and enforced, particularly during periods of organizational change such as mergers.

As part of the settlement, First Horizon has agreed to a cease-and-desist order and a censure, in addition to the monetary penalty. This case underscores the ongoing regulatory focus on Reg BI compliance and the potential consequences for firms that fall short of these obligations.

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