Summit Equities, Inc., a brokerage firm headquartered in Parsippany, New Jersey, has been censured and fined $325,000.00 by Financial Industry Regulatory Authority (FINRA) based upon consenting to findings that the firm did not adequately supervise registered representatives’ private securities transactions as well as recommendations of variable annuity share classes. Letter of Acceptance, Waiver and Consent, No. 2015043159201 (May. 1, 2017).
According to the AWC, the firm enabled DG, a registered representative, to create GEH, a broker dealer, in order to sell securities issued by a hedge fund, DC, which was operated by DG. Apparently, DG was informed that DC securities were only to be sold by GEH, and that the placement or sale of securities transactions had to be received and booked via the firm. Apparently, GEH was utilized by DG to effect multiple hedge funds’ securities sales which were not disclosed to Summit Equities, Inc. In one case, in 2011, an estimated $6,200,000.00 worth of IME Fund limited partnership interests were sold by DG to eleven customers of Summit Equities; yet, these sales had not been disclosed to Summit Equities. Evidently, the IME Fund later failed and resulted in customers’ sustaining nearly ninety-five percent losses.
The AWC indicated that DG’s activities involving GEH were not reasonably supervised by Summit Equities. The firm reportedly neglected to review records and books of GEH in any consistent manner, nor did the firm visit the GEH location or review communications made by the GEH to determine the extent of their sales. The AWC also cited Summit Equities for failing to make sure that the restrictions imposed on DG were complied with or reasonable measures were set forth to monitor the sales activity that DG effected through GEH. Consequently, FINRA found that Summit Equities’ conduct was violative of FINRA Rule 2010, as well as NASD Rules 2110, 3010 and 3040.
Moreover, according to the AWC, from October 1, 2011, and December 1, 2015, the recommendations of variable annuities share classes made by the firm’s registered representatives had not been adequately supervised by the firm. Apparently, variable annuity contracts were sold by the firm with different share classes: B share annuity contracts had seven-year commitment periods; L share annuity contracts had higher fees but a shorter four-year commitment period. The AWC indicated that nearly forty-five percent of the contracts sold by Summit Equities’ agents were L share annuity contracts.
The AWC revealed that the firm did not set forth written supervisory procedures designed to help principals and registered representatives determine the suitability of the annuity contracts based upon the types of share classes. The AWC stated that it was not until April of 2015 that the firm provided guidance and training on the features, benefits and drawbacks of the different share classes.
According to the AWC, it was not until April of 2015 that the firm reasonably detailed how share classes could be compared and contrasted for purposes of determining suitability. Additionally, the AWC stated that the firm did not provide staff with the appropriate training and guidance for determining the appropriateness of L share annuity contracts when sold with income riders intended to guarantee long-term income to customers. FINRA found the firm’s supervisory failures in this regard to be violative of FINRA Rules 2010, 2330, and 3110, as well as NASD Rule 3010.
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