Additional Violations Included Unreasonable Charges for Bond Trades; Former Chief Compliance Officer Fined and Suspended
Washington, DC — The Financial Industry Regulatory Authority (FINRA) announced today that it has fined NEXT Financial Group, Inc., headquartered in Houston, TX, $1 million for supervisory violations that primarily involved the failure to supervise its approximately 130 Office of Supervisory Jurisdiction (OSJ) branch managers, who typically supervise transactions and sales activity for individual brokers or branches within a particular region. OSJ branch managers' transactions and sales activities are then supposed to be supervised by another registered principal designated by the firm.
Between January 2005 and November 2006, the firm allowed its OSJ branch managers to self-supervise their own handling of customer accounts without adequate review. In November 2006, the firm adopted a Regional Manager supervisory system to provide principal review of the OSJ managers’ transactions. Through at least December 2007, however, this new system was also unreasonable because, among other reasons, it required three Regional Managers to review thousands of transactions each month with limited access to client suitability information.
The lack of reasonable policies and written procedures resulted in the firm’s failure to detect churning of customer accounts by an OSJ manager, Gregory Horton, and a broker, Timothy Shively, as well as excessive markups and markdowns on corporate bond trades by another two brokers. As a result, customers of the firm, including elderly and retired individuals, lost about $768,000, which has been reimbursed. In separate actions, FINRA barred Horton and Shively from the industry in January 2008 and October 2008, respectively.
“These violations demonstrate why supervisory controls and reviews are so important at every firm and go the heart of FINRA’s rules,” said Susan L. Merrill, Executive Vice President and Chief of Enforcement. “The protection of investors demands that a brokerage firm devote sufficient resources to its compliance and supervisory programs for both brokers and managers who are handling customer accounts.”
Under FINRA rules, firms must appoint one or more principals to “establish, maintain, and enforce a system of supervisory control policies and procedures.” During 2007 and 2008, the firm failed to reasonably satisfy its obligations because, among other failures, it did not adequately test the firm’s supervisory systems or provide adequate review of OSJ branch managers.
FINRA further found that the firm’s systems and procedures governing variable annuity exchanges were not reasonable. Variable annuity sales accounted for approximately 33 percent of the firm’s revenue during the relevant period. The firm’s written supervisory procedures, however, failed to provide adequate guidance concerning the criteria that should be considered in recommending variable annuity exchanges to its customers including, for example, a comparison between the features, costs and benefits of the old and new products.
FINRA also found that the firm failed to apply its written heightened supervision procedures to at least two representatives and properly fingerprint firm employees resulting in it hiring a statutorily disqualified person in its main office.
In connection with the above systemic deficiencies FINRA also sanctioned Karen Eyster, the firm’s former Chief Compliance Officer and Chief Operating Officer, for failing to fulfill her supervisory obligations. Eyster was the principal responsible for the firm’s supervisory systems and written procedures and failed to create a reasonable system for supervising OSJ branch managers and the Regional Managers who subsequently supervised the branch managers. FINRA fined Eyster $35,000 and suspended her as a principal for two months. FINRA is also requiring Eyster to re-take her qualifying examination to be a supervisor and take 15 hours of training on supervision issues.
As part of the settlement, the firm must certify that it has implemented new systems and procedures reasonably designed to achieve compliance with the federal securities laws and FINRA Rules described above and in other areas identified in the settlement agreement.
In settling this matter, NEXT and Eyster neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA's BrokerCheck. FINRA makes BrokerCheck available at no charge. In 2008, members of the public used this service to conduct 11.6 million reviews of broker or firm records. Investors can access BrokerCheck at www.finra.org/brokercheck or by calling (800) 289-9999.
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