Houston-based Next Financial Group will pay a $750,000 fine and hire an outside consultant to check the adequacy of various compliance controls in order to settle claims it failed to fix problems alleged in previous disciplinary actions.
According to the Financial Industry Regulatory Authority (Finra), Next responded to those earlier actions – each of which it settled without admitting or denying wrongdoing – by adopting new measures in an effort to correct alleged deficiencies. But these new procedures used ‘flawed methodologies and allowed misconduct to occur,’ Finra officials write in a letter of acceptance, waiver and consent (AWC) in which the firm agrees to settle the action, again without admitting or denying wrongdoing.
The primary violation occurred between May 2014 and September 2015, when Next used faulty exception reports to detect excessive trading, failed to perform any review of those reports for a 14-month period and allowed excessive trading to continue due to inadequate oversight, Finra alleges.
The failure by some compliance personnel to fulfill their duties was not detected owing to a lack of procedures requiring follow-up on delegated supervisory tasks, the self-regulatory organization (SRO) says. These supervisory failures allowed a registered representative to excessively trade a senior investor’s accounts, resulting in losses of roughly $391,893, according to Finra.
The SRO alleges that Next had similar deficiencies between August 2012 and April 2014 in that it lacked a surveillance system that monitored for problematic rates of exchange regarding variable annuities (VAs). The firm also had inadequate exception reports, and its procedures ignored risks associated with multi-share-class VAs, Finra says.
In addition, Finra alleges that the firm failed to reasonably monitor the use by its registered reps of consolidated reports, did not take steps to ensure information on its website about Next’s financial partners was accurate and did not reasonably supervise non-cash compensation received by its registered reps.
The firm agrees to retain an independent consultant to conduct a comprehensive review of the adequacy of Next’s policies, systems, procedures and training relating to the alleged violations identified in the AWC. The areas for assessment are: actively traded accounts, VA sales and exchanges, consolidated reports and timely disclosure of product sponsor participation in the firm’s financial partner program. The consultant will also review the adequacy of Next’s systems to track, verify and supervise non-cash compensation received by associated persons.
In a statement filed with the regulatory settlement, Next officials describe the ‘many corrective actions [the firm] has taken in response to the issues described in the AWC.’ For example, they say Next has revised its process for cleating excessive trading reports to identify accounts for further review so that reports would calculate each account’s turnover ratio and cost-to-equity ratio using trade data for a rolling 12-month period.
In addition, the firm has established a sales practice review committee, which is composed of senior members of the compliance, legal and operations departments, and has implemented procedures whereby certain potential sales practice violations identified either by surveillance or supervisory personnel must be submitted to the committee.
‘Next also believes the addition of certain compliance and legal personnel, effected prior to and independent of Finra’s enforcement action, will greatly aid the firm in addressing Finra’s concerns regarding its ability to detect excessive trading and other issues,’ the officials write.
Among other things, Next officials say the firm has:
- Made several enhancements to its written supervisory procedures and systems pertaining to VA sales and exchanges, such as implementing a two-step, pre-execution review and approval process
- In regard to the prompt and accurate public disclosure of the firm’s revenue-sharing arrangements, adopted a written supervisory procedure to require the tracking of the date each product sponsor enters and leaves the partner program.
‘We’re happy to have these things settled and to move past them,’ a spokesperson for Next says.
Ben Maiden
Ben Maiden is the editor-at-large of Governance Intelligence, an IR Media publication, having joined the company in December 2016. He is based in New York. Ben was previously managing editor of Compliance Reporter, covering regulatory and compliance...
