Kingswood Capital Partners LLC Fined by FINRA for Supervisory Failures Involving GWG L Bonds
FINRA has reportedly issued an Acceptance, Waiver and Consent (AWC) against Kingswood Capital Partners LLC, citing supervisory and procedural failures related to the sale of illiquid alternative investments, including GWG L Bonds, to senior customers.
Kingswood Capital Partners LLC (CRD #288898) has been a FINRA member since 2018 and is headquartered in San Diego, California.
Under the AWC, Kingswood was reportedly censured and fined $150,000 for violations of FINRA Rules 3110 (Supervision) and 2010 (Standards of Commercial Honor and Principles of Trade).
FINRA’s Findings Against Kingswood Capital Partners
According to FINRA, from March 2019 through June 2019, Kingswood failed to reasonably supervise a former registered representative’s recommendations of illiquid alternative investments to three senior customers. FINRA also reportedly found that Kingswood failed to establish and maintain written supervisory procedures (WSPs) reasonably designed to ensure compliance with suitability requirements for these products.
The alleged violations centered on Kingswood’s approval and supervision of alternative investments, including GWG L Bonds, which carried significant risk characteristics.
GWG L Bonds and Investor Risk
GWG L Bonds were sold to retail investors through multiple broker-dealers, including Kingswood. Kingswood entered into an agreement with GWG to sell L Bonds in April 2018 and approved the product for sale by its registered representatives.
Key risk factors associated with GWG L Bonds included:
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The bonds were not rated by any bond rating agency
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They were not directly secured by GWG’s life insurance portfolio
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The offering documents described the bonds as speculative, high-risk, and illiquid
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The bonds were only considered suitable for investors with substantial financial resources and no need for liquidity
Despite these warnings, FINRA found that the bonds were recommended to certain senior customers whose investment profiles did not align with the risks involved.
In January 2022, GWG defaulted on its obligations to L Bond investors and suspended further sales. In April 2022, GWG filed for bankruptcy, resulting in substantial losses for many retail investors.
Deficient Supervisory Procedures
FINRA also identified significant deficiencies in Kingswood’s written supervisory procedures during the relevant period. Although Kingswood’s WSPs required supervisors to review transactions for suitability, FINRA found they were not reasonably designed for illiquid alternative investments.
Specifically, the firm’s procedures failed to:
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Identify factors supervisors should consider when assessing concentration in illiquid products
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Explain how concentration determinations should be made
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Define what would constitute a potentially overconcentrated position
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Provide guidance on corrective steps if overconcentration was identified
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Explain how suitability and concentration reviews should be documented
These supervisory gaps contributed to unsuitable recommendations being made to senior investors, according to FINRA.
Investor Losses and Potential Claims
Regulatory actions involving GWG L Bonds continue to raise concerns about broker-dealer due diligence, product approval processes, and supervision of alternative investment sales. Investors who suffered losses may have potential claims through FINRA arbitration, particularly where recommendations were unsuitable or supervisory failures occurred.
The White Law Group represents investors nationwide in claims involving illiquid alternative investments, including GWG L Bonds, and investigates whether broker-dealers failed to meet their regulatory obligations.
Frequently Asked Questions
What did FINRA allege against Kingswood Capital Partners?
FINRA alleged that Kingswood failed to reasonably supervise recommendations of illiquid alternative investments and failed to maintain adequate written supervisory procedures designed to ensure suitability compliance.
Why are GWG L Bonds considered high risk?
GWG L Bonds were illiquid, unrated, speculative investments that were not directly secured by GWG’s life insurance portfolio. GWG later defaulted and filed for bankruptcy.
What options do investors have after suffering losses?
Investors may be able to pursue recovery through FINRA arbitration if their broker recommended unsuitable investments or if the firm failed to properly supervise those recommendations.
