NEXT Financial Sanctioned by FINRA for Violations of Suitability Rule
A broker-dealer is obligated to ensure its brokers offer only suitable options to customers, typically by establishing and maintaining a system of supervision that ensures compliance with applicable laws. When NEXT Financial Group, Inc. was found to have violated that practice, FINRA sanctioned the firm with a censure, fine, and a requirement that it consult with an independent expert on ways to improve its supervision of brokers; of particular concern is excessive trading and variable annuities.
The Allegations Against NEXT Financial Group: an Overview
NEXT Financial Group, Inc. is a broker-dealer specializing in general securities and based in Texas; it’s been a member of FINRA for more than 20 years. In July 2021, FINRA issued a Letter of Acceptance, Waiver, and Consent as a result of its investigation into NEXT Financial’s supervisory practices when it came to ensuring broker activities were in compliance with legal requirements. In addition to the formal censure, NEXT Financial was fined $750,000 and required to work with an outside consultant to improve its supervisory system, including related written procedures, to address problems with unsuitability in recommending short-term mutual funds and municipal bonds to customers.
Unsuitability and Supervisory Concerns
The cause of FINRA’s investigation was allegations that a broker carried out unsuitable short-term trades on Class A mutual funds in the accounts of senior citizens, resulting in more than $900,000 in fees. This same broker also relied on unsuitably trading short-term municipal bonds originating in Puerto Rico. These bonds presented unique investment challenges due to the Puerto Rican economy. When red flags were raised and NEXT Financial investigated, the broker being questioned gave answers that FINRA described as misleading. NEXT Financial neglected to reconcile the broker’s explanations with the irregularities in customer accounts and furthermore, neglected to increase supervision of this broker until customer complaints started coming in.
What Happens Now
FINRA charged NEXT Financial with violations of the rules that require member firms to develop and uphold appropriate supervisory systems, including procedures to check and make sure the supervisory system is effective at establishing and maintaining compliance with relevant legal and regulatory standards. Now, NEXT Financial is obligated by FINRA to come up with a better supervisory system that includes written procedures and is expressly designed to eliminate inappropriate short-term trading of mutual funds and municipal bonds. Once FINRA signs off on the agreement with NEXT Financial, the firm is time-bound to pay the fine and organize a new system of supervision by the deadline given to it by the regulator.
For investors who may be caught up in this or a similar situation, you may be able to recover your losses because of not only the broker’s mishandling of your accounts but the member firm’s lack of supervision of its brokers.
The Wolper Law Firm represents investors nationwide in securities litigation and arbitration on a contingency fee basis. Matt Wolper, the Managing Principal of the Wolper Law Firm, is a trial lawyer who has handled hundreds of securities cases during his career involving a wide range of products, strategies and securities. Prior to representing investors, he was a partner with a national law firm, where he represented some of the largest banks and brokerage firms in the world in securities matters. We can be reached at (800) 931-8452 or by email at email@example.com.