Summit Brokerage Services Inc. a securities broker dealer headquartered in Boca Raton Florida has been censured and fined $325,000.00 by Financial industry Regulatory Authority (FINRA) based upon findings that (1) Summit Brokerage Services neglected to supervise its stockbrokers’ recommendations for purposes of ensuring that the stockbrokers’ trades were suitable for customers of the firm and (2) Summit Brokerage Services failed to supervise the dissemination of consolidated reports to customers by the firm’s stockbrokers. Letter of Acceptance Waiver and Consent No. 2016052655301 (July 2, 2019).
According to the AWC, between January of 2012 and March of 2017, Summit Brokerage Services neglected to create and implement a supervision system or enforce written supervisory procedures designed for the firm’s compliance with FINRA Rules concerning suitability. The AWC stated that throughout this period, compliance principals employed by the firm were tasked with reviewing the trades placed by its stockbrokers. Part of this process involved the use of tools, including trade alerts; however, the procedures governing the use of those reports had not been enforced.
The AWC indicated that between January of 2012 and March of 2017, trade alerts had been received by Summit Brokerage Services referencing instances of high cost-to-equity ratios and turnover ratios in customers’ commission-based investment accounts. Apparently, those alerts were necessary to review for purposes of determining if stockbrokers’ placed excessive trades in customer accounts. Yet, the alerts were not factored into the compliance principals’ analysis when determining the suitability of stockbrokers’ investment recommendations.
Evidently, the firm failed to uncover that trades were excessively executed by a stockbroker, CJ, in the accounts of fourteen Summit Brokerage Services customers. In one circumstance, a total of two-hundred sixty-seven trades had been recommended by CJ in the account of a retired customer, JO. Apparently, trades placed by CJ caused at least $61,000.00 in commissions to be charged to JO, which made JO’s account have a cost-to-equity ratio exceeding twenty-seven percent. In another circumstance, five hundred thirty-three trades had been placed by CJ in the account of a retired customer, MP, causing MP to be assessed $171,000.00 in commissions and suffer from a cost-to-equity ratio exceeding thirty-two percent.
The AWC revealed that one hundred fifty alerts had been generated in regard to the trades CJ placed in the fourteen customers’ accounts. Critically, Summit Brokerage Services never reviewed those alerts. As a result, a total of $651,405.23 in excessive commissions had been assessed, and customers realized approximately $300,000.00 in losses. FINRA found the firm’s conduct violative of FINRA Rules 2010 and 3110 as well as National Association of Securities Dealers (NASD) Rule 3010.
The AWC additionally stated that consolidated reports were created and disseminated by Summit Brokerage Services stockbrokers without the firm’s supervision. Evidently, between June of 2015 and March of 2018, the firm neglected to create and implement adequate supervision systems and written supervisory procedures to comply with FINRA rules relating to consolidated reports. During this time, FINRA warned the firms about the need to properly supervise those reports to prevent misleading and confusing information from being provided to customers about most or all of their assets.
Apparently, the firm did utilize a supervisory procedure for consolidated reports which prohibited stockbrokers’ dissemination of those reports without supervisory review and approval. However, FINRA stated that there was no reasonable system utilized by the firm to show whether stockbrokers complied with that written supervisory procedure. In fact, only eight of one hundred three stockbrokers followed the firm’s rules. Moreover, fifteen of the firm’s stockbrokers utilized third parties to draft the reports contrary to the firm’s rules. The AWC referenced that in one case, a customer was sent a consolidated report from a stockbroker containing grave misstatements concerning the customer’s investment holdings. FINRA found the firm’s failure to supervise consolidated reports to be violative of FINRA Rule 2010 and 3110.
