NOTE: Stipulations of Fact and Consent to Penalty (SFC); Offers of Settlement (OS); and Letters of Acceptance Waiver, and Consent (AWC) are entered into by Respondents without admitting or denying the allegations, but consent is given to the described sanctions & to the entry of findings. Additionally, for AWCs, if FINRA has reason to believe a violation has occurred and the member or associated person does not dispute the violation, FINRA may prepare and request that the member or associated person execute a letter accepting a finding of violation, consenting to the imposition of sanctions, and agreeing to waive such member's or associated person's right to a hearing before a hearing panel, and any right of appeal to the National Adjudicatory Council, the SEC, and the courts, or to otherwise challenge the validity of the letter, if the letter is accepted. The letter shall describe the act or practice engaged in or omitted, the rule, regulation, or statutory provision violated, and the sanction or sanctions to be imposed.

NEXT Financial Group, Inc.
AWC/2009016272902

NEXT Financial Group did not have a reasonable system for reviewing its registered representatives’ transactions for excessive trading. The firm relied upon its OSJ branch managers to review its registered representatives’ transactions and home office compliance personnel to review its OSJ branch managers’ transactions, but the firm failed to utilize exception reports or another system, and the supervisors and compliance personnel only reviewed transactions on weekly paper blotters or electronic blotters.

The monthly account statements and contingent deferred sales charge reports for mutual fund activity were also available for review and could be indicators of excessive trading, however, given the volume of trading certain principals reviewed, and in certain cases, the large number of representatives for which the principal was responsible, it was not reasonable to expect principals to be able to track excessive trading on a weekly sales blotter, let alone through monthly account statements or mutual fund sales charge reports.

Due to the lack of a reasonable supervisory system, the firm failed to detect a registered representative’s excessive trading, which resulted in about $102,376 in unnecessary sales charges; the firm failed to identify or follow up on other transactions that suggested other registered representatives’ excessive trading in additional customer accounts. 

The Firm did not have a reasonable system for ensuring that it obtained and documented principal review of its registered representatives’ transactions, including sales of complicated products such as variable annuities, and the firm should have been particularly attentive to maintaining books and records that established that the transactions had been properly reviewed. The firm failed to provide reasonable supervision of municipal bond markups and markdowns to ensure that its registered representatives charged its customers reasonable markups and markdowns. In addition,  the firm’s branch office examination program was unreasonable because it was not designed to carry out its intended purpose of detecting and preventing violations of, and achieving compliance with, federal, state and FINRA securities regulations, as well as its own policies.

The firm failed to have a reasonable supervisory system to oversee implementation of its heightened supervision policies and procedures for its registered representatives as it failed to comply with the terms of its heightened supervision for its registered representatives regarding client complaints, regulatory actions or internal reviews, therefore it had a deficient implementation of heightened supervision policies and procedures.

The firm failed to have a reasonable supervisory control system or to have in place Supervisory Control Procedures as required by FINRA Rule 3012, and it failed to perform adequate 3012 testing or prepare adequate 3012 reports. Moreover,the firm failed to have a reasonable system and procedures in place to review and approve investment advisors’ private securities transactions.

Furthermore, the firm filed inaccurate and late Rule 3070 reports relevant to customer complaints, and did not file or amend Form U4 and Uniform Termination Notice for Securities Industry Registration (Form U5) reports in a timely manner.

The Firm's AML systems and procedures were unreasonable, as the firm failed to establish and implement an AML Compliance Program reasonably designed to achieve compliance with NASD Rule 3011. Although the firm utilized a money movement report, its supervisors did not 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, and thus failed to investigate and report these activities in accordance with its own procedures and the requirements of the Bank Secrecy Act and the implementing regulations.

In addition, over 1.3 million shares of a company’s stock were traded in customer accounts a registered representative serviced; during a one-week period, the firm’s only AML exception report that monitored large money movement flagged the customer’s account, but the firm took no action and failed to file any SARs as appropriate.

NEXT Financial Group, Inc.: Censured; Fined $400,000; Ordered to pay $103,179.84, plus interest, in restitution to customers.

Tags: Bank  AML  SAR  Mutual Funds  Annuity  Mark-Up Mark-Down