NEXT Financial Consents to $750K FINRA Penalty for Sales Violations

NEXT Financial has already paid $4.3 million in restitution as a result of the sales violations.

NEXT Financial is a Houston-based firm that employs 540 brokers and hybrid representatives. NEXT Financial has been the subject of an action brought by the Texas State Securities Board in 2020, several customer arbitration disputes, and a FINRA investigation in addition to a $750k fine in 2017. Most recently, NEXT Financial agreed to a FINRA settlement consenting to findings that a NEXT broker violated a variety of sales rules by making unsuitable short-term trades of mutual funds and over-concentrating customer accounts in Puerto Rican municipal bonds. FINRA’s findings against Next Financial are provided below.

July 2021 Regulatory Judgment

• Status: Final
• Initiated By: FINRA
• Allegations: Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it failed to establish, maintain, and enforce a supervisory system, including written supervisory procedures (WSPS), reasonably designed to detect and prevent unsuitable short-term trading of mutual funds and municipal bonds in customer accounts and over-concentration of customer accounts in Puerto Rican municipal bonds. The findings stated that this matter originated from a tip to FINRA, a customer arbitration filed against the firm, and an examination of the firm. The findings also stated that the firm’s automated surveillance system to identify and flag for review Class A share switches was not reasonably designed to achieve compliance with the applicable FINRA Rules because it did not provide critical data to assist the supervisors in evaluating the transactions for suitability. In addition, when the system flagged a switch transition, the firm provided supervisors with no guidance through its WSPS to assist in evaluating the suitability of the switch and no information regarding appropriate holding periods for Class A shares. After updates to the WSPS, the criteria to be used by supervisors was vague and did not provide sufficient guidance. The firm allowed supervisors to clear individual alerts after obtaining an explanation from the registered representative, without any further investigation. This included instances in which red flags should have put supervisors on notice that the explanations were incomplete or inaccurate. Additionally, the WSPS did not discuss suitability reviews specific to municipal bonds, or address factors to be considered in determining appropriate levels of concentration or provide any other additional suitability guidance regarding holding periods for municipal bonds, or address factors to be considered in determining appropriate levels of concentration or prove any other additional suitability guidance that assist supervisors in analysing the suitability of municipal bonds. As a result, the firm failed to detect and reasonably respond to red flags in the trading of a specific broker prior to customers incurring significant losses.These red flags included short-term trading of mutual funds and municipal bonds, as well as over-concentration of Puerto Rican municipal bonds in customer accounts, that resulted in customers incurring unnecessary sales charges to totalling approximately $925,000 and losses of approximately $4.1 million. The firm performed a review of the broker’s switching activity after an employee raised questions about his trading. The review highlighted the fact that the broker was moving his customers in and out of mutual funds and Puerto Rican municipal bonds. When the broker was questioned regarding the activity, he gave misleading explanations to justify the activity and no further review of the transactions was conducted. The firm’s failure to conduct a further review to verify the broker’s explanations was not reasonable given the inconsistency of those explanations with the multitude of red flags in the customers’ account information and in the firm’s blotter. The firm did not address the red flags associated with the transactions again until after arbitrations were filed by customers regarding both the Class A share and Puerto Rican municipal bonds transactions. The findings also included that the firm failed to establish, maintain, and enforce a reasonable system of supervisory control policies and procedures to test and verify its surveillance systems. Although the firm performed annual tests of its supervisory procedures and created a report regarding those tests, the tests were not reasonably designed. None of these tests examined whether the system to supervise two active business lines – mutual funds and municipal bonds – was reasonably designed to achieve compliance with FINRA and Municipal Securities Rulemaking Board (MSRB) suitability rules. As a result of the misconduct, the firm violated MRSB Rules G-27(B), (C), and (F). 
• Resolution: Acceptance, Waiver & Consent (AWC)
• Sanctions: Censure – Monetary/Fine
• Amount: $750,000.00
• Other Sanctions Ordered: The firm shall certify in writing in FINRA that the firm has implemented supervisory systems and written supervisory procedures reasonably designed to address unsuitable short-term trading of mutual funds and municipal bonds in customer accounts and over-concentration of customer accounts and over-concentration of customer accounts in Puerto Rican municipal bonds.

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The Sonn Law Group is currently investigating allegations surrounding NEXT Financial. We represent investors in claims against negligent brokers and brokerage firms. If you or your loved one experienced investment losses, we are here to help. For a free consultation, please call us now at 866-827-3202 or complete our contact form.