FINRA Fines Next Financial for Failing to Supervise Bond and Mutual Fund Trading

Chicago-based Stoltmann Law Offices represents investors have suffered losses from the negligence and breach of fiduciary duty of registered investment advisors (RIAs).  All too often brokers and RIAs trade in customers’ accounts to generate fees and commissions. This practice reduces their total returns while enriching broker-advisor firms. When regulators crack down on these practices, they usually find it’s a “failure to supervise” by the brokerage firm with whom the advisor is registered.

FINRA, the federal securities regulator, fined Next Financial Group, a $2.6 billion RIA and broker-dealer owned by Atria Wealth Solutions, $750,000 to settle charges that it failed to supervise ‘unsuitable’ trading of mutual funds and municipal bonds by one unnamed broker, according to citywireusa.com. “FINRA found that the broker engaged in short-term trading of Class A mutual fund shares in 19 client accounts, resulting in ‘unnecessary’ front-end sales charges of $925,000 from 2012 until February 19.” Additionally, FINRA found that “from June of 2013 to November of 2016, the broker engaged in short-term trading of Puerto Rican municipal bonds in 16 customer accounts, concentrating five of the accounts in these bonds.”

Certain classes of mutual funds and related investments carry higher commissions and fees than others. Broker-advisors are required to tell clients that trading in and out of these investments will generate higher income for the firm and its representatives. They are also required under FINRA rules to fully disclose the downside of the investments, which should be suitable for the client’s age and risk tolerance.

“These bonds carried risks not associated with other municipal bonds because of concerns about the Puerto Rican economy and subsequent restructuring of Puerto Rican debt. The risk of such concentration was compounded by frequent trading in the PR Bonds because of the repeated payment of upfront costs that would ‘decrease any investment returns,’” FINRA said in its complaint. The broker’s customers lost a combined $4.1 million on investments in Puerto Rican bonds, FINRA found.

Despite revealing the broker’s practices, Next Financial’s internal review “led to no further probe or disciplinary action,” FINRA said. “It wasn’t until arbitrations were filed by two customers in June and September of 2018 that the firm once again addressed the broker’s activity.”

Next Financial did not admit or deny the findings, but agreed to improve broker supervision and flag suspicious trading. Atria responded in a statement: “We have already taken steps to enhance our controls and remain focused on effective compliance practices that protect our advisors and their clients.”

Next Financial has been cited in the past for alleged supervisory lapses. Securities regulators in New Hampshire and Massachusetts  last year fined the firm $475,000 for allegedly failing to “reasonably supervise the sale of non-traded REITs.”

Have you invested with RIAs or broker-advisers who have put your retirement funds at risk or failed to protect you from risky or scam investments? FINRA and the SEC have strict rules on protecting financial information held by brokers and investment advisers. If they don’t secure your account, you may have a case in arbitration. They are obligated to provide solid cybersecurity measures to protect your assets.

Firms are also legally required by FINRA to monitor and supervise what their brokers are selling – their investments must be vetted and authorized by the firms – and have an obligation to investors to fully reveal true risk and return information about the securities sold. Investors can file FINRA arbitration complaints if these rules are broken.

If you invested with an investment advisor and lost money as a result, you may have a claim to pursue through FINRA Arbitration. Please contact Stoltmann Law Offices, P.C. at 312-332-4200 for a free, no obligation consultation with a securities attorney. Stoltmann Law Offices is a contingency fee law firm which means we do not get paid until you do!