Secretary of the Commonwealth of Massachusetts William Galvin said Monday he had charged a former Next Financial Group broker with violations of state securities laws due to his alleged practice of overconcentrating customers in illiquid, high-commission products, including nontraded real estate investment trusts and variable annuities.
The broker, Charles C. Kulch, generated almost $1 million in commissions from the sale of REITs and variable annuities in a five-year period, according to a statement from Galvin's office.
Galvin's office has been scrutinizing broker-dealers' sales of nontraded REITs for years and fining firms for failing to supervise how brokers sell the product, which has carried a high commission in the past.
Kulch, who did not return a call Monday to comment, was registered with Next Financial from 2006 through last month, according to his BrokerCheck report. He is currently not registered with a broker-dealer.
A spokesperson for Atria Wealth Solutions, the broker-dealer network that owns Next Financial, said that the firm has made “made significant investments in our compliance controls and continue to focus on elevating our compliance practices across the organization.”
At the end of last year, the Massachusetts Securities Division said it had reached a settlement and fined Next Financial $150,000 for sales practice violations and a failure to supervise, including allegedly unsuitable sales of REITs by an unidentified rep over a 10-year period. Massachusetts also alleged that many of the sales exceeded limits as determined by a client’s overall liquid net worth.
At the same time, the New Hampshire Bureau of Securities said it had also reached a settlement with Next Financial for failing to supervise sales of alternative investments. It said that in 2017 the bureau received a complaint from a Massachusetts resident alleging, in part, that a broker, Charles C. Kulch, had sold him securities that were not suitable.
The Massachusetts complaint against Kulch alleges that he wrongly calculated the percentage of customers’ liquid net worth, while also failing to account for the reduction in liquid net worth for each transaction.
The complaint also alleges that Kulch sold nontraded REITs to more than 100 Massachusetts investors, including nearly 50 transactions that openly violated Next Financial’s own policies pertaining to overconcentration and prohibiting the sale of nontraded REIT’s to customers over the age of 80.
Nontraded REITs are high-commission products, and their sales peaked in 2013 before the industry’s push to meet requirements of various fiduciary rules or proposals that essentially limit the commissions firms and brokers charge for sales of investment products.
Because REITs are a so-called alternative investment, states also typically have limits on the amount of the product a broker can sell to an individual investor, based on the client’s liquid portfolio or assets.
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