[ by Howard Haykin ] A broker-dealer based in Bloomington, IL, with branches throughout the country, agreed to settle FINRA charges that it failed to adequately supervise equity trading with an eye to detecting and/or preventing excessive trading. Background on Respondent, Prior Relevant Discipline. First Midwest Securities, Inc. ("First Midwest"), a FINRA member since 5/20/88, employs about 117 registered individuals operating out of 47 branch locations throughout the country. The firm had relevant disciplinary history. In one case, just one year earlier, it agreed to a $150K fine for allegedly having charged a "handling fee" that was unfairly discriminatory and not accurately disclosed on the confirmation.  The excessive mark-ups were on riskless principal transactions involving municipal securities . In January 2010, First Midwest agreed to pay $11.3K in fines and restitution for allegedly having failed to sell bonds at a price that was fair, taking into consideration, all relevant circumstances, and failing to implement a supervisory system and written supervisory procedures. FINRA Findings and Allegations in This Incident. During a 4-year period, from January 2006 through December 2009, First Midwest failed to establish and maintain adequate supervisory policies and procedures pertaining to excessive trading of equities. As a result, the firm failed to detect and take action against excessive trading by a registered rep. FINRA noted that the firm did not utilize exception reports available from the firm's clearing firms to assist in detecting patterns of unsuitable excessive trading - these reports ID'd turnover and commission-to-equity ratio in customer accounts.  The firm began to use such reports at a later date. Instead, to identify unsuitable excessive trading, the firm relied on the daily review of trade blotters as well as turnover ratio reports that were prepared manually and reviewed by the firm’s compliance staff on a semi-annual basis. The manually-prepared reports did not address cost-to-equity ratios in accounts. FINRA findings included the fact that the firm’s WSPs provided inadequate guidance on how the reports should be prepared and used. They further did not offer specific guidance on how accounts should be reviewed for excessive trading, nor did they provide for the supervisory measures that would be implemented to detect and prevent such activity. The firm’s procedures did call for a semi-annual review of an Active Account Report - somewhat late and behind the times - but the firm didn't even utilize this report.  Nevertheless, the firm contacted customers whose accounts were subject to active trading by sending them an Intent to Maintain an Active Account Form.  However, those forms did not provide customers with details such as the amount of commissions paid. All told, supervisory deficiencies included the following

• firm failed to identify and prevent an RR's excessive trading in certain customer accounts.
• firm did not utilize exception reports to assist in detecting patterns of unsuitable excessive trading.  Such reports were available from clearing firms - particularly exception reports, that ID'd turnover and commission-to-equity ratio in customer accounts.  Instead, firm decided to implement daily reviews of these records some time later.
• firm incorrectly relied on the review of trade blotters as well as semi-annual review of turnover ratio reports.
• manually-prepared reports, however, did not address cost-to-equity ratios in accounts.
• firm WSPs also provided inadequate guidance on how reports should be prepared and how supervisors should utilize such reports.
• firm's WSPs failed to provide for how accounts would be reviewed for excessive trading;  nor did it provide for supervisory measures that would be implemented to detect and prevent such activity.
• although firm contacted customers whose accounts were subject to ctive trading by sending them an "Intent to Maintain an Active Account Form," those forms didn't provide customers with details - e.g., amount of commissions paid.

First Midwest Securities, Inc., for its deficient efforts agreed to pay $75K to settle FINRA charges. For further details, go to:   [FINRA Disciplinary Actions for August 2012] and   [FINRA AWC #2009020663201].