NEXT Financial Group a securities broker dealer headquartered in Houston Texas has been censured and fined $750,000.00 by Financial industry Regulatory Authority (FINRA) founded on findings that NEXT Financial Group failed to supervise its stockbrokers’ transactions resulting in unsuitable municipal bond and mutual fund transactions in customer accounts. Letter of Acceptance Waiver and Consent No. 2019063058701 (July 13, 2021).
According to the AWC, from January of 2012 to February of 2019, NEXT Financial Group depended on its electronic systems to identify instance of Class A mutual fund share switches. If detected, then Next Financial Group’s supervisors were supposed to look into the transactions to identify whether they were suitable for customers. FINRA noted that the surveillance system used by the securities broker dealer was deficient as it did not allow supervisors to have important information that related to suitability.
NEXT Financial Group’s alert system showed no details concerning the period of time that Class A mutual fund shares were held for. There was no way for a supervisor to use this system to identify if there was short-term trading taking place. There was no way for them to establish whether the switch transactions were inappropriate. The securities broker dealer’s methods were also faulty because supervisors were not provided with guidance to evaluate suitability. FINRA noted that before 2015 the supervisors relied upon written supervisory procedures that did not identify reasonable holding periods.
The AWC stated that alerts were cleared by supervisors without stockbrokers’ explanations and without supervisors doing additional reviews of the circumstances. Alerts were cleared in situations where superiors knew that stockbrokers provided inaccurate or incomplete explanations as it pertained to the suitability of transactions.
FINRA also indicated that from January of 2012 to February of 2019, the supervision system at NEXT Financial Group failed to show when customer accounts were overconcentrated in municipal bonds or when municipal bond trades were executed on a short-term basis in NEXT customer accounts. The written supervisory procedures overlooked the suitability issues with municipal bonds. There was no guidance relating to when those securities should be held for or when there may be an over concentration of those securities in customer accounts.
There were red flags that the firm did not detect concerning a particular stockbroker’s transactions. The AWC revealed that this stockbroker’s trades resulted in substantial losses for customers. The red flags concerned Puerto Rican municipal bonds being overconcentrated in their accounts.
The regulator also mentioned that the stockbroker placed short-term trades of Class A mutual fund shares in 19 different customer accounts. Most of those accounts were held by seniors. The investors had to pay $925,000.00 in inappropriate sales charges.
FINRA additionally indicated that this stockbroker concentrated at least five customers’ accounts in Puerto Rican bonds. This presented special risks because of Puerto Rico’s economy and debt problems. Customers sustained $4,100,000.00 in losses. The stockbroker provided NEXT Financial Group with misleading information regarding his activities but the securities broker dealer failed to properly follow up or investigate him. The AWC stated that the stockbroker’s actions were not further reviewed or subject of heightened review until customers filed investment related arbitrations. Customers continued to sustain losses until March of 2019.
FINRA determined that Next Financial Group failed to supervise in violation of MSRB Rule G-27(b) and (c), FINRA Rules 3110(a) and (b), and NASD Rules 3010(a) and (b).