Next Financial Group Inc. of Houston agreed to refund $500,000 to customers of a former Texas agent who for five years moved clients in and out of high-cost mutual funds to generate commissions.
Next Financial Group also paid a $100,000 fine to the State of Texas for failing to properly supervise the agent, who worked for the brokerage from 2007 until Sept. 27, 2019. He is no longer registered to sell securities in Texas.
The sanctions are part of a Disciplinary Order that Texas Securities Commissioner Travis J. Iles entered on Feb. 13.
Next Financial Group will apportion the $500,000 to the former agent's customers based on the amount of mutual fund trading in their accounts during the five-year period.
From 2014 through 2018, the agent made hundreds of trades involving the Class A shares of mutual funds, which typically cost investors more than other mutual fund share classes because they carry an upfront sales charge of up to 5% or higher.
The charge, known as a front-end sales load, is paid to the broker as a commission.
The agent consistently bought and sold these high-cost mutual funds for clients, claiming it was part of a research-based mutual fund trading strategy.
Next Financial Group failed to rein in the agent even though it received hundreds of alerts from the regulatory system it had set up to detect mutual-fund switching.