A Houston, Texas-based midsize independent broker-dealer will pay $750,000 to settle a FINRA case for alleged systemic supervisory failures relating to excessive trading and variable annuities, according to the signed agreement.
The firm, NEXT Financial Group, was also censured and required to retain an independent consultant.
Atria Wealth Solutions, which acquired NEXT in June 2019, said NEXT has already enhanced its controls and remains focused on effective compliance practices that protect its advisors and their clients, according to a statement.
By settling, NEXT agrees to FINRA’s conditions without admitting or denying the findings.
From January 2012 through February 2019, NEXT allegedly failed to establish, maintain and enforce a supervisory system, including written supervisory procedures, 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.
In addition, from March 2013 through February 2017, the firm allegedly failed to create a reasonable system of controls to test and verify that its supervisory procedures could achieve compliance.
As a result of the alleged misconduct, NEXT violated securities laws and regulations, and FINRA rules.
Overall, NEXT’s supervisory structure was not particularly good, says Benjamin Edwards, associate law professor at the William S. Boyd School of Law, citing the firm’s supervisors’ lack of diligence about following up, even in instances where there were significant red flags.
“One of the challenging things for supervisors at a lot of independent brokerage firms is that oftentimes these guys are off in their own offices, doing their own things, and they’re not closely supervised with someone in their physical office.
“The compliance person is in a real pressure spot — you don’t tend to get large bonuses for rigorously protecting the investing public by preventing profitable transactions for the brokerage firm. So it’s a hard spot to be in,” he says.
While FINRA has a strong case against NEXT, veteran securities attorney Bill Singer, of Herskovits PLLC in New York City, wonders why it took officials almost a decade to notice these alleged violations.
Wall Street, Singer explains, has a two-tiered system of investor protection. The first is the in-house compliance departments.
The alleged red flags, Singer says, should have alerted the compliance department, which is all the more troubling because the misconduct impacted senior citizen investors.
However, when that line of defense crumbles, the second line of defense is supposed to be the SEC, state securities regulators and FINRA, according to Singer.
“The takeaway is that the consumer, the investing public, is not being well-served. FINRA is fining the firm hundreds of thousands of dollars, but never caught this for eight years,” he says.
Due to the alleged misconduct, FINRA fined NEXT what Edwards considered a somewhat significant amount.
The fine will change behavior at NEXT because if it doesn’t rectify these alleged kinds of violations, it will have more problems, such as investor lawsuits or more thorough examinations from vendors, according to Edwards.
However, the $750,000 fine probably isn’t large enough to deter this type of alleged conduct at other mid-sized firms in the future, he says.
Ideally, compliance departments would watch every time one of these announcements comes out and make any necessary modifications to prevent similar sanctions.
But if nothing else, Edwards says brokerage firms should probably take to heart that their electronic supervision systems need to be kept up to date and capable of capturing all these known red flags.