Massachusetts Secretary of the Commonwealth William Galvin announced Monday that he has charged a former NEXT Financial Group representative with violations of the state’s securities laws.
The representative is accused of the “repeated practice of over-concentrating his customers in illiquid, risky, high commission products, such as non-traded real estate investment trusts [REITs] and variable annuities.”
According to the administrative complaint filed by the Massachusetts Securities Division, the representative used “dishonest sales practices to sell non-traded REITs and other risky alternative investments to customers for whom they were unsuitable, in violation of his own employer’s stated policies.”
The complaint alleges the individual sold non-traded REITs to more than 100 Massachusetts investors, including nearly fifty transactions which openly violated NEXT Financial’s own policies pertaining to over-concentration and prohibiting the sale of non-traded REIT’s to customers over the age of 80.
Offering some important insight for anyone tasked with monitoring the sales activities of registered representatives, the complaint further states that the individual wrongly calculated the percentage of customers’ liquid net worth, while also failing to account for the reduction in liquid net worth for each transaction.
“All the while, [the representative] generated nearly $1 million in commissions from the sale of REITs and variable annuities in a five year period,” the complaint states. “By disregarding or circumventing established concentration limits, [he] generated hundreds of thousands of dollars in commissions at the expense of Massachusetts investors.”
With the complaint, the Securities Division is seeking an order requiring the individual to provide restitution to fairly compensate investors. The Securities Division is also seeking an administrative fine and an order to have the individual permanently barred from acting as a registered investment adviser representative.
This is not the first time an adviser associated with NEXT Financial has come under scrutiny from Massachusetts securities regulators regarding the sale of REITs. A consent order filed by the state’s Securities Division back in December stated that the regulator “discovered multiple sales of non-traded REITs that exceeded NEXT’s own guidelines regarding the concentration of a customer’s liquid net worth in alternative investments, such as non-traded-REITs.” The order stated that, over a period of nearly six years, NEXT processed many transactions which exceeded its own written liquid net worth concentration guidelines. The Securities Division also identified sales of non-traded REITs to investors over the age of 80, which again is contrary to NEXT’s written supervisory procedures.
In a statement to PLANADVISER, the firm says it no longer employs the representative named in the complaint. “Additionally, we have made significant investments in our compliance controls and continue to focus on elevating our compliance practices across the organization,” the firm says.
Taking a step back, attorneys who are expert in retirement plan compliance under the Employee Retirement Income Security Act (ERISA) say there is some food for thought in these matters for retirement plans and their fiduciaries—but not necessarily a direct point of concern. As fiduciaries and service providers increasingly consider the role of alternatives like REITs in their defined contribution (DC) plans, it is likely that the process will be an incremental one, which may start with the utilization of an alternatives sleeve in a target-date fund (TDF). Given that fact and that the development of this process will involve investment professionals on the side of the TDF and the managers, situations like this one are probably unlikely.