FINRA Fines NEXT Financial Group $1 Million for Supervisory Failures
Former Chief Compliance Officer Fined and Suspended
The Financial Industry Regulatory Authority (FINRA) announced that it has fined Houston, Texas-based brokerage firm NEXT Financial Group, Inc. $1 million for supervisory violations. According to FINRA, between January 2005 and November 2006, NEXT allowed branch managers to supervise their own handling of customer accounts without adequate review. Although NEXT ultimately adopted a Regional Manager supervisory system to provide review of the branch managers’ transactions, FINRA determined that this new system also was inadequate because, among other reasons, it required three Regional Managers to review thousands of transactions each month with limited access to client suitability information.
FINRA has reported that NEXT’s faulty supervisory practices resulted in the failure to detect churning of customer accounts by one of its branch managers, Gregory Horton, and a broker, Timothy Shively, as well as excessive markups and markdowns on corporate bond trades by two other brokers. As a result, NEXT’s customers, including elderly and retired individuals, lost hundreds of thousands of dollars. In separate actions, FINRA barred Horton and Shively from the industry in January 2008 and October 2008, respectively.
FINRA’s Executive Vice President and Chief of Enforcement stated that “[t]hese violations demonstrate why supervisory controls and reviews are so important at every firm and go the heart of FINRA’s rules.” The FINRA official also stated that “[t]he 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.”
FINRA also sanctioned Karen Eyster, the firm’s former Chief Compliance Officer and Chief Operating Officer, for failing to fulfill her supervisory obligations. Ms. Eyster was responsible for NEXT’s supervisory systems and written procedures. According to FINRA, Ms. Eyster failed to create a reasonable supervisory system. FINRA fined Eyster $35,000 and suspended her as a principal for two months. FINRA also is requiring Eyster to re-take her supervisory examination and take 15 hours of training on supervision issues.
In settling this matter, NEXT neither admitted nor denied FINRA’s charges, but consented to the entry of FINRA’s findings.
Dimond Kaplan & Rothstein, P.A. has represented a number of investors who maintained their accounts with NEXT and the aforementioned NEXT representative, Gregory Horton.