Next Financial Investors Lose $4.1 Million Due to Alleged Mutual Fund Switching

Did you lose money because of mutual fund switching at Next Financial? According to Next Financial’s detailed BrokerCheck report, investors lost over $4 million due to unsuitable mutual fund and municipal bond recommendations made by a Next Financial broker. The securities lawyers of Kurta Law can help you recover your losses – reach out if you believe you may be entitled to recover money.

According to Next Financial’s Acceptance, Waiver, and Consent agreement (AWC), an investor complaint prompted FINRA’s investigation – an important reminder that individual investors can affect change in the securities industry.

Next Financial Fined $750,000 by FINRA

On July 13, 2021, FINRA fined Next Financial $750,000 following allegations that the firm did not properly supervise their brokers’ mutual fund recommendations. FINRA requires brokerage firms to supervise their representatives to ensure they adhere to securities laws and FINRA rules. Next Financial allegedly did not protect their investors from unnecessary charges related to mutual fund Class A shares and municipal bonds.

Both Class A mutual funds and municipal bonds should be held for a long time, but FINRA alleges that Next Financial did not conduct a review of suspicious short-term trading in these securities.

Why Were the Transactions Unsuitable?

Both Class A mutual funds and municipal bonds come with upfront fees that make them unsuitable for short-term trades.

• Class A mutual funds typically come with a “front load,” or an upfront fee. Most of the front load gets paid to the broker as a commission. This adds to the annual service fee. Because of the up-front costs, investors should plan to hold on to their Class A mutual funds for a relatively long period. If an investor waits too short a time to sell their Class A mutual fund and uses the proceeds to invest in a new mutual fund, they could end up paying unnecessary sales charges. Using proceeds from the sale of a mutual fund to invest in a new mutual fund is called “mutual fund switching.”
• Municipal bonds are also long-term investments. Like Class A mutual funds, municipal bonds come with upfront costs. Investors should hold on to these securities to preserve capital while generating tax-advantaged income. Brokers should not recommend short-term trading of municipal bonds because of the upfront costs.

Did Next Financial’s System Fail to Catch Unsuitable Trades?

From 2012 thru February 2019, FINRA alleges that Next Financial relied on an automated surveillance system to flag unsuitable Class A mutual fund switches. Allegedly, this system did not do its job and failed to provide supervisors with critical information. For instance, it failed to provide information about the holding periods for certain mutual funds, so it was allegedly not possible for supervisors to determine if short-term trading had occurred.

Broker Allegedly Earned $925,000 for Unnecessary Transactions

FINRA alleged that Next Financial supervisors did not adequately review one of their broker’s transactions. Instead, the broker’s unsuitable recommendations only came to light after investors allegedly suffered significant losses. (The AWC refers to the broker only as “Broker A.”) The firm should have flagged the broker’s transactions due to their short-term trading of mutual funds and municipal bonds, as well as over-concentration in Puerto Rican municipal bonds. Puerto Rican bonds are especially unsuitable given the country’s bleak financial outlook.

From 2012 until early 2019, Broker A allegedly engaged in short-term trading of Puerto Rican bonds in 19 investor accounts. Many of these accounts allegedly belonged to seniors. Broker A also allegedly engaged in short-term trading of Class A mutual fund shares, resulting in unnecessary sales charges totaling $925,000 and losses of $4.1 million.

According to FINRA, Next Financial reviewed Broker A’s switching activity only after an employee raised questions about his trading. FINRA alleges that Broker A offered misleading explanations for their mutual fund switching, which should have prompted further investigation. FINRA alleges that Next Financial did not perform any further review or attempt to verify Broker A’s explanations. The regulator alleges this was not reasonable, given the many red flags associated with Broker A’s trading activity.

Next Financial: Next Steps

In addition to the $750,000 fine, Next Financial has agreed to certify in writing that they have implemented improved supervisory procedures. Hopefully, these new procedures will save future investors from losses. But if you’ve lost money after investing with Next Financial, it’s not too late. Contact Kurta Law for a free case evaluation. Call 212-658-1502 or email jkurta@kurtalawfirm.com.