NEXT Financial Group, Inc. (“NEXT” or NFG”) is a broker-dealer registered with Financial Industry Regulatory Authority (FINRA), based in Houston, TX. The firm conducts business in the state of Massachusetts, and was recently fined $150,000 by the State of Massachusetts Securities Division over unsuitable sales and failure to supervise non-traded real estate investment trust (REIT) transactions.
It is believed that the underlying regulatory investigation involved a retired veteran’s account where there were multiple sales of non-traded REITs that exceeded NEXT’s own internal compliance policies or guidelines regarding customer investor concentration levels for these types of illiquid alternative investments. The fine imposed by the regulators appears to be the result of a consent order where NEXT neither admits or denies the underlying factual allegations, but notes that over a period of some six years, NEXT processed many transactions that exceeded its own written concentration guidelines related to investor net worth levels, and also involved allegations of non-traded REIT sales to customer investors over age 80, which was also contrary to NEXT’s own written supervisory procedures.
According to Palm Beach, Florida investment fraud lawyer, Jason Haselkorn, Esq. with Haselkorn & Thibaut, P.A., the recent fine reported by the Massachusetts securities regulators demonstrates that the non-traded REIT sales and supervision issues are currently on the minds of both the federal as well as the state securities regulators.
Financial advisors must be properly supervised by firms like NEXT. Brokerage firms owe a duty to investor clients to properly supervise and monitor their employees. Supervisory responsibilities on the part of the firms are a critical component of the securities regulatory scheme. Firms and supervisors cannot ignore red flags and they have responsibilities to detect and prevent improper activity.
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About Next Financial
NEXT Financial is a Houston, TX. Based broker-dealer firm with more than 500 financial advisors nationwide, responsible for managing over $13 billion in assets under management. Based on a review of FINRA Brokercheck, NEXT was first FINRA registered in 1999, and currently has a total of 27 reported disclosures, 21 of which are regulatory events. NEXT appear to have a history of violations that includes sales of private placement issues, excessive trading issues, variable annuity supervision issues, and failures to detect excessive trading in senior investor accounts. In June 2019, Atria Wealth Solutions, Inc. reportedly completed its acquisition of NEXT Financial Group. Atria Wealth Solutions also owns CUSO Financial Services, Sorrento Pacific Financial (SPF), and Cadaret, Grant & Co. with a total of 1,400 financial advisors nationwide and a combined over $50 billion in assets under management.
Background on Suitability and Supervision of Non-Traded REIT Sales
These investments are generally offered by financial advisors working at independent broker-dealer firms such as NEXT. They represent one type of Direct Participation Programs (DPPs). Non-Traded REITs are typically risky illiquid alternative investments that the United States Securities and Exchange Commission (SEC) define as a “Reg D” offerings also known as “private placement.” The reference to Regulation D provides exemptions from the typical registration requirements of Section 5 of the Securities Act of 1933.
A brokerage firm such as NEXT that is selling a private placement still has a duty to conduct a reasonable investigation of any securities it recommends. The types of problems that FINRA found in the past with regard to some private placements were significant and include outright fraud and sales practice abuse in Regulation D offerings. With private placements, the firm recommending the investment to a customer must also conduct a reasonable investigation into the issuer and its management, the business prospects of the issuer, the assets held by or to be acquired by the issuer, the claims being made by the issuer, and the intended use of the offering. Failure of a firm to adequately investigate a given private placement can result in a violation of antifraud provisions of federal securities law, as well as FINRA Rule 2010 (adherence to just and equitable principles of trade) and Rule 2020 (prohibiting manipulative and fraudulent devices). In addition to various cases and enforcement actions cited in Regulatory Notice 10-22 (and its endnotes), another sweep by FINRA resulted in more crackdowns on firms (and individuals) that did not conduct a reasonable investigation before selling private placements to customers.
Also, with respect to private placement investments, broker-dealer firms still must supervise their brokers in the investigation and recommendation being made to the customer. In addition to the typical supervision duties that a broker-dealer firm has over its registered representatives, as required by FINRA Rule 3010, private placements necessitate additional supervisory procedures. As reminded by FINRA Regulatory Notice 10-22, those additional supervisory procedures must be reasonably designed to ensure that a broker-dealer firm’s registered representatives: (1) engage in an inquiry that is sufficiently rigorous to comply with their legal and regulatory requirements; (2) perform the analysis required by FINRA Rule 2111 (formerly, NASD Rule 2310); (3) qualify their customers as eligible to purchase securities offered pursuant to Regulation D; and (4) do not violate the antifraud provisions of the federal securities laws or FINRA rules in connection with their preparation or distribution of offering documents or sales literature. Importantly, each Reg. D offering must be properly supervised “before it is marketed to other firms or sold directly to customers.”
Investors Seeking to Recover Losses Related to Non-Traded REITs
For some investors, a private FINRA arbitration customer dispute enables them to bring a claim and potentially recoup their investment losses. These customer disputes typically involve only paper discovery and no depositions, and they are a faster and more efficient alternative to traditional court litigation, as they provide a private forum to resolve disputes more quickly and efficiently. Investors can get a free case consultation by visiting InvestmentFraudLawyers.com.