Next Financial Group Inc. is back in hot water with regulators and agreed on Tuesday to pay a $750,000 fine to Finra as part of settlement for a variety of violations, including the failure to catch a broker's excessive trading and poor supervision of variable annuity sales.
From 2009 to 2014, the
Financial Industry Regulatory Authority Inc. fined Next Financial $1.54 million and ordered it to pay $2.1 million in restitution to clients over a variety of issues, ranging from the sale of fraudulent private placements to excessive trading and running up sales commissions by brokers.
In response to those and other issues, the firm, which has 600 registered brokers and generated $107.8 million in revenues last year, adopted new measures to correct those deficiencies, according to the settlement. Those new policies didn't sufficiently take hold, according to Finra. The firm's new procedures employed flawed methods "and allowed misconduct to occur,"
according to Finra.
"A lot of firms have had problems with VA sales issue," said Barry Knight, Next Financial's president. "We put procedures in place and in some instances, they were flawed. This cleans up everything that was out there from 2013 to 2015 and outstanding deficiencies. There was nothing from the 2016 Finra audit and we believe we have remedied the failings."
Next Financial's current fine stems from various industry violations from August 2012 to September 2015. The primary violation occurred when the firm failed to detect excessive trading in a senior investor's accounts that resulted in losses of $392,000 and an unnamed broker generating total gross commissions of $148,000, according to the settlement. The firm later fired the rep and settled with the customer for $387,000.
The firm had similar problems concerning the supervision of sales of variable annuities, which accounted for a significant part of its revenues, during that time period, according to Finra. Next Financial "failed to implement a supervisory system and procedures designed to ensure appropriate suitability determinations in its VA sales, including L-share contracts."
A variable annuity L share has a shorter surrender period than other share classes but can be more expensive because of the extra liquidity. Regulators have recently put L shares under scrutiny for suitable sales to investors with longer time periods or investment horizons.
Next Financial's due diligence over variable annuity transactions fell short, according to Finra.
"Specifically, the firm failed to establish, maintain and enforce systematic procedures to identify possible inappropriate rates of VA exchanges," according to Finra. "Instead, the firm relied on its principals reviewing VA transactions to manually identify significant trends in terms of high volume VA exchange transactions, without providing any guidance or tools such as exception reports or trend analysis to assist the reviewers in evaluating whether exchange rates were excessive."
