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Regulatory Sanctions

Summit Brokerage Had Lax Supervision Over Excessive Trading and Consolidated Reports

July 4, 2019

by Howard Haykin


It cost Summit Brokerage Services nearly $900,000 in fines, restitution and prejudgment interest to settle FINRA charges that it failed to reasonably supervise its registered reps for excessive trading and their proper use of consolidated reports. Summit, a FINRA member since 1994, has around 740 registered persons operating out of some 311 branch offices



WHAT WENT WRONG – EXCESSIVE TRADING.    From January 2012 through March 2017, Summit failed to adequately supervise its Registered Representatives (“RRs”), particularly for potential excessive trading.


Over those 5 years, Summit employed between 3 and 6 compliance principals who were supposed to utilize trade alerts provided by Summit's clearing firms to review registered reps’ trading activity. However, a number of trade alerts that were relevant to identifying excessive trading - including alerts related to turnover and cost-to-equity ratios in commission-based accounts - were not provided to the compliance principals. Instead, the compliance principals relied on a strictly manual review of the blotter to identify potential excessive trading.


As a result, these manual reviews of the trade blotter did not identify that one RR ("CJ") excessively traded 14 customers' accounts. For example, …


  • CJ recommended 267 trades over a 3-year period in the account of a retired woman, whose net worth was less than $500,000. That customer ended up paying >$61,000 in commissions and her annualized cost-to-equity ratios exceeded 27%.
  • CJ placed 533 trades over a 3-year period in the account of a retired woman whose net worth was less than $1 million. That customer paid >$171,000 in commissions and her cost-to-equity ratios exceeded 32%.
  • CJ excessively traded in the accounts of 14 customers, and that trading generated more than 150 alerts for potentially excessive turnover rates and cost-to-equity ratios. The Firm received those alerts, but, as discussed above, no one at the Firm reviewed them. And collectively, these 14 customers paid $651,405 in commissions during the 5-year period, and they suffered realized losses of more than $300,000.


As a result of the foregoing, Summit violated NASD Rule 3010 (for conduct before December 2014), FINRA Supervision Rule 3110 (for conduct beginning December 2014), and FINRA Rule 2010.



WHAT WENT WRONG – CONSOLIDATED REPORTS.    From June 2015 through March 2018, Summit failed to adequately supervise its RRs in the creation and dissemination of consolidated reports – documents that present information about most or all of a customer's financial holdings, including assets held away from the firm.


During that 3-year period, while Summit’s WSPs prohibited RRs from sending customers consolidated reports unless they used a template that had been reviewed and approved by the Firm's compliance department, the firm did not have a reasonable system to track whether its RRs complied with these procedures prior to sending consolidated reports to customers. As it turned out, …


  • Of the 103 RRs who sent consolidated reports to their customers during this period, only 8 submitted templates to the Firm's compliance department for prior review and approval.
  • Of the remaining 95 RRs, 15 violated Summit’s prohibition by disseminating consolidated reports that were generated by unapproved 3rd-party vendors.
  • And one consolidated report distributed by an RR materially misstated the value of a customer's investment.


As a result of the foregoing, Summit violated FINRA Rules 3110 and 2010.



For further details on ‘Consolidated Reports’ and supervisory issues pertaining to these documents, click on FINRA Regulatory Notice 10-19. 

For further details on this case, click on ...  FINRA AWC #2016052655301.