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NEXT Financial Group Fined $1,000,000

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NEXT Financial Group was fined $1,000,000 by regulators for supervisory violations. Those failures to supervise involve failing to properly supervise its approximately 130 Office of Supervisory Jurisdiction branch managers. These are the branch managers who typically supervise transactions and sale activity for individual stockbrokers. Branch manager’s own transactions and sales activities are then supposed to be supervised by another registered principal designated by the firm. But for NEXT Financial Group, for a time it had a system that was unreasonable, because it required certain Regional Managers to review thousands of transactions each month, with limited access to any customer’s 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. Because of the lack of supervision, customers of the firm, including elderly and retired individuals, lost more than $750,000. Regulators have barred Horton and Shively from the industry.

“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 at FINRA. “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.” For at least two years, 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 this time. The firm’s written supervisory procedures failed to provide enough guidance concerning the factors 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.

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.


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