NEXT Financial Group is in the hot seat again. The Securities Exchange Commission issued an Order Instituting Cease-and-Desist Proceedings against the independent broker/dealer late last month.
The regulator filed the Order on August 24 with 22 instances where clients’ private information was allegedly mishandled, consequently violating Regulation S-P—the SEC’s adoption of client privacy laws under Gramm-Leach-Bliley Act of 2000. The instances center around the methods used by NEXT’s “transition team” to help bring on new reps. (Read Registered Rep.’s September cover story about how Regulation S-P is affecting independent b/ds.)
According to the Order, the transition team assisted new recruits by “pre-populating” account transfer documents such as automated customer account transfer forms (ACATS), new account information forms, change of broker/dealer letters and mailing labels. The team provided all recruits with a sample Excel document showing what types of customer information to provide in order to start pre-population.
The SEC says, until February 2007, the customer information called for in the Excel document for each customer accounts included, name of primary account owner, brokerage account numbers, “direct” accounts numbers such as mutual fund account numbers and variable annuity account numbers. Also requested was whether or not each brokerage account is “managed”, social security or tax ID numbers, account type, net worth, annual income, years of investment experience, mailing address, home telephone number, date of birth, bank name, passport number, driver’s license number, occupation and employment information. According to the SEC, such material is non-pubic personal information and cannot be shared with unaffiliated 3rd parties.
Further, the SEC claims that NEXT’s transition team sometimes used recruits’ user ID and password, to access recruits’ current b/d computer system to download non-public personal information used to pre-populate documents, and to access various mutual fund and annuity company websites to extract customer information. In at least one instance, NEXT received non-public personal client information from a recruit who later decided not to join the firm, yet the customer information was retained in NEXT’s computer system.
“The SEC's investigation of this matter has been ongoing for the past two years. We had hoped that the SEC would address this issue by providing guidance, not only to NEXT, but to all independent broker/dealers, rather than proceed with an administrative action. While we have made changes to address the regulators’ concerns, we will continue to fight on behalf of all representatives in support of the rep/client relationship, as well as the ability for reps to freely change broker/dealers,” said President of NEXT, Barry Knight.
The independent b/d industry’s lobbying group, the Financial Services Industry has been pursuing regulatory relief from the SEC's interpretation of Regulation S-P, and formed a task force to review the impact of the SEC's current interpretation of Reg S-P and evaluate any proposed regulatory relief. In the meantime, the group says it’s reported concerns to the SEC and requested an opportunity to discuss them more fully and working to schedule a follow-up discussion.
As for the case against NEXT, the matter is waiting to go before an administrative law judge no later than 60 days from the date the Order was issued.