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Regulatory Sanctions

Summit Hits Bottom Over Supervisory Failures (Part 1)

August 21, 2017

by Howard Haykin


Financialish covers in two parts FINRA sanctions against Summit Equities for supervisory failures involving VARIABLE ANNUITIES (Part One) and private securities transactions (Part Two).


Summit Equities agreed to a $325K fine in part to settle FINRA charges that it failed to reasonably supervise its registered reps’ recommendations of multi-share class variable annuities to customers.


BACKGROUND. Summit Equities, a FINRA member since 1982, is based in Parsippany, NJ. The firm employs around 132 registered persons. Summit Equities has no relevant disciplinary history.


FINRA FINDINGS.    Between 10/1/11 and 12/1/15, Summit Equities sold 1,037 individual variable annuity (“V/A”) contracts to customers. When purchasing V/A contracts, customers had a choice of share classes, including “B” and “L” shares:

  • B-share contracts, the most common share class sold in the industry, typically have a 7-year surrender period.
  • L-share contracts typically provide a shorter surrender period of 3-4 years. Insurance companies design L-share contracts so that customers pay a higher fee in exchange for the increased liquidity provided by the shorter surrender period. Such fees, assessed for as long as the contract is held, are typically between 35-50 basis points higher annually than most B-share contracts.


Yet, despite the significant role that V/A sales played in Summit Equities' overall business, the Firm failed to prepare its registered reps and supervisory principals with sufficient knowledge to sell and monitor multi-share class V/A contracts to its customers – in particular L-share contracts, which made up about 45% of all Summit Equities V/A sales.


Where did Summit Equities go wrong?


  • It failed to establish, maintain, and implement reasonable supervision and WSPs related to the sale of multi-share-class V/A’s.
  • It failed to train or to provide everyday guidance for registered reps and principals on suitability considerations for sales of different V/A share classes.
  • It failed to train registered reps and principals on features of various V/A share classes and the associated fees and surrender charges.
  • It failed to train registered reps and principals on the sale of long-term income riders with multi-share-class V/A’s.


As a result, Summit Equities violated FINRA V/A rules [FINRA Rules 2330(d) and (e)] and Supervision rules [NASD Rule 3010(a) and (b), and FINRA Rule 3110(a) and (b)].  


FINANCIALISH TAKE AWAYS.    Broker-dealers and their registered reps are handsomely compensated for selling variable annuity contracts, which are designed to be long-term investments. Which led insurance companies to offer L-Shares – that reduce surrender schedules. Added features, however, come with added costs ... and potentially higher commissions. Therein lies a major concern – the added risk of “Conflicts of Interest.” Which is why comparison of various share classes have become more involved, and more important. And, of course, there's another key risk associated with V/A contracts which FINRA didn’t address in this case – that of exchanging one V/A contract for another. 


For further info on compliance concerns in variable annuity transactions, access the following articles on sites unrelated to (i);  (ii)


This case was reported in FINRA Disciplinary Actions for July 2017.

For details on this case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2015043159201.