Next Financial Fined Over Nontraded REIT Sales

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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.