NEW YORK — NEXT Financial Group Inc., which is in the middle of a scrap with the Securities and Exchange Commission over its use of confidential client information when recruiting representatives, is getting strong support in some corners of the independent-contractor brokerage industry.
The defense of NEXT Financial and Gordon D’Angelo, the chairman and chief executive of NEXT Financial Group Holding Co., was particularly fervent in some of the messages posted last week in a private e-mail thread of compliance executives and lawyers, sponsored by the Financial Services Institute Inc., an industry trade group based in Atlanta.
NEXT Financial, which was founded in 1999, has about 700 affiliated registered reps and has been one of the fastest-growing independent-contractor broker-dealers in recent years.
Some industry executives want to go toe-to-toe with regulators over the matter.
“This needs to be aggressively pursued and defended by the FSI, with a campaign directed at the SEC, FINRA and Congress,” one of the messages said, according to an industry lawyer who read the messages. FINRA is the New York- and Washington-based
Financial Industry Regulatory Authority.
“Patience only works to the advantage of the regulators,” said another message, according to the lawyer, who asked not to be identified.
On Aug. 24, the SEC slapped Houston-based NEXT Financial with an administrative order that was the first step in a cease-and-desist proceeding. The order alleged that NEXT Financial committed a series of errors in handling clients’ private information when it recruited brokers, thus violating Regulation S-P, which is the securities industry’s adoption of stricter privacy laws under the Gramm-Leach-Bliley Act of 2000.
The SEC has had NEXT Financial in its sights over the issue for two years. The SEC in February told NEXT Financial that it intended to file charges related to the firm’s practice of instructing broker recruits to provide customer information to the firm in anticipation of a move.
Eventually, a hearing will be scheduled before an SEC administrative-law judge to decide the matter.
Defending NEXT’s position
Mr. D’Angelo, who is based in Virginia Beach, Va., declined to comment about the specific allegation in the SEC order.
He did, however, defend the company’s position.
“In general, we feel that the SEC had not notified the industry about their concerns over Reg S-P. I’m not arguing the letter of the law, but there’s no customer complaint, no corporate complaint,” Mr. D’Angelo said.
“We haven’t decided our strategy yet, but we feel it’s important to defend the independent firms.”
The FSI said that it won’t step in on behalf of NEXT Financial.
Instead, it will continue to pursue discussions with the SEC to get clear guidance for firms concerning how to comply with Regulation S-P to protect client information, according to David Bellaire, the FSI’s general counsel.
With the potential case over possible privacy violations against NEXT Financial looming, the SEC and the FSI have batted the privacy issue back and forth over the past few months (InvestmentNews, Aug. 27).
“We were hopeful the SEC wouldn’t take this step,” Mr. Bellaire said. The FSI will continue to work with the SEC’s market regulation group to deal with the concept of broker-dealers’ sharing customer information, he said.
“We stay away from enforcement activity,” Mr. Bellaire said.
In the order, which is similar to a civil complaint, the SEC alleged that the violations at NEXT Financial occurred as recently as February, with the firm carrying out many of the potential violations through last May and June.
The SEC order lists 22 “facts,” or instances where clients’ private information was mishandled, and those buttress the SEC’s allegations of five potential violation of Regulation S-P.
The order stated that the company “received non-public personal customer information from a recruit, only to have the recruit decide not to join NEXT.” The firm didn’t destroy that information, according to the SEC, but it “was retained on the NEXT computer system.”
Also, until May 2006, the firm’s “database in which customer information was stored could be accessed by anyone at the NEXT home office,” according to the complaint.
NEXT Financial’s team that helped recruits also allegedly encouraged brokers to e-mail a completed Excel spreadsheet with confidential client information. This was done so that NEXT Financial could begin filling in transition documents.
The company doesn’t encrypt e-mail, according to the order.
