Massachusetts securities regulators have fined Next Financial Group $150,000 over unsuitable sales of nontraded real estate investment trusts to elder investors and related supervisory failures.
In addition to the fine, the consent order requires the Houston-based independent broker-dealer to offer restitution to the Massachusetts residents who were sold unsuitable investments.
The Massachusetts Securities Division opened an investigation after receiving a complaint in July 2017 from a retired veteran who had been sold annuities and nontraded REITs, despite his expressed desire for “conservative investments.”
The regulators then discovered multiple sales of nontraded REITs that exceeded Next’s guidelines for the concentration of a client’s liquid net worth in alternative investments.
Over a period of nearly six years, Next processed many transactions that topped these guidelines, the consent order states. In addition, regulators uncovered sales of nontraded REITs to investors over age 80, contrary to the independent broker-dealer’s supervisory procedures.
(Next was bought by Atria Wealth Solutions in January, when it had some 500 advisors and $13 billion in assets under administration.)
The client who contacted regulators said he did not fully understand the nature of the alternative investments sold to him by a representative of Next (who was not identified by name). He and other clients completed an alternative investment disclosure form.
Regulators say that nontraded REITs are considered to be illiquid investments and as such should not exceed 20% of a client‘s liquid net worth; plus, no more than 5% of a client‘s liquid net worth should be placed in any single investment program, and alternative investments should not be sold to investors over the age of 80.
Over a decade, the Next rep “recommended and sold hundreds of nontraded REITs to Massachusetts investors. The Enforcement Section alleges that many of these sales were unsuitable and exceeded Next‘s liquid net worth concentration guidelines,” the consent order stated.
Between 2010 and 2015, the IBD processed more than 300 REIT purchases for more than 160 Massachusetts-based clients. During this same time period, it also processed at least 51 nontraded REIT transactions that exceeded its concentration guidelines.
For 48 of these transactions, the IBD processed multiple simultaneous nontraded REIT transactions in a client‘s account without accounting for corresponding reductions in the individual‘s liquid net worth.
Thus, Next “incorrectly calculated the percentage of a customer‘s liquid net worth that each non-traded REIT purchase constituted,” the order explained.
Of those 51 transactions, three nontraded REIT sales involved clients over age 80 at the time.
“We have already taken steps to enhance our controls and remain focused on effective compliance practices that protect our advisors and their clients,” the IBD said in a statement emailed to ThinkAdvisor.