NEXT Financial Group (Houston, TX) agreed to pay over $500K in fines and restitution plus interest, to settle FINRA charges it didn't have in place adequate procedures for reviewing excessive trading by RR's.  Although OSJ branch managers did review transactions by RR's, and home office compliance personnel did review transactions by OSJ branch managers, the reviews allegedly were based on weekly paper blotters or electronic blotters, and did not utilize exception reports or another system.  For example, NEXT principals could have reviewed monthly account statements and mutual fund CDSC reports.

Yet, even with those additional review aids, firm principals would still have been hard-pressed to track excessive trading - given the volume of trading they had to review, along with the large numbers of RR's that certain principals had been assigned.  As a result, the firm apparently failed to detect excessive trading by an RR that resulted in $102,000 in unnecessary sales charges.  The firm also, allegedly failed to ID or to follow up on other transactions that suggested other RR's engaged in excessive trading in additional customer accounts. 

    FINRA's Other Findings.   The firm allegedly didn't have a reasonable system for ensuring that it obtained and documented principal reviews transaction by RR's - including sales of variable annuities and other complicated products.  FINRA notes that NEXT should have been particularly attentive to maintaining books and records that established that the transactions had been properly reviewed. The firm also further allegedly failed to provide reasonable supervision of municipal bond markups and markdowns.  In addition, there were these alleged supervisory deficiencies:

• firm's branch office exam program was unreasonable, in that it wasn't designed to carry out its intended purpose of detecting and preventing violations of securities rules and regs, as well as firm pols and procedures. 
• firm failed to reasonably oversee implementation of its heightened supervision policies and procedures - as it pertained to RR's with client complaints, regulatory actions or "black marks" arising from internal reviews.
• firm failed to have in place Supervisory Control Procedures as required by FINRA Rule 3012 - and further failed to conduct adequate 3012 testing or to prepare adequate 3012 reports.
• firm failed to adequately review and approve investment advisors’ private securities transactions.
• firm filed inaccurate and late Rule 3070 customer complaint reports, did not file or amend Forms U4 and U5 in a timely manner.
• firm failed to establish and implement an AML Compliance Program reasonably designed to achieve compliance with NASD Rule 3011.
• supervisors failed to detect red flags involving numerous instances of potentially suspicious activities relating to the trading of a company’s stock and the transfers of proceeds relating to the trading of a stock, even though they had use of a money movement report.

• i.e. - over 1.3 million shares that company’s stock were traded in customer accounts serviced by a single RR; 
• during a one-week period, the firm’s only AML exception report flagged the customer’s account, but the firm took no action nor filed any SAR.

For further details on FINRA Case #2009016272902, or other cases, go to:    [FINRA Disciplinary Sanctions for January 2011]