Summit Brokerage Services, Inc. – a broker-dealer registered with the Securities and Exchange Commission and a member of the Financial Industry Regulatory Authority – agreed to pay sanctions of US $880,000 to FINRA to resolve charges that it failed to adequately detect and prevent excessive trading by a former salesperson who subsequently was banned by FINRA.
According to FINRA, from January 2012 through March 2017, Summit’s procedures required it to review trade alerts from clearing brokers to evaluate its registered representatives’ trading activity. However, claimed FINRA, during this time, the firm’s compliance principals did not review such alerts related to turnover and cost-to-equity ratios; instead, they solely conducted manual reviews of trade blotters to detect for potential excessive trading.
Moreover, during the relevant time, the review process did not detect that one salesperson – solely identified by FINRA as “CJ” – had excessively traded 14 accounts, including one for a retired customer with a net worth of less than US $500,000, who paid more than US $61,000 in commissions and had a cost-to-equity ratio in excess of 27%. CJ recommended 267 trades for this customer over a three-year period during the relevant time.
All told, claimed FINRA, accounts traded by CJ generated more than 150 alerts for potentially excessive turnover rates and cost-to-equity ratios during the relevant time, none of which were reviewed by Summit compliance principals. FINRA calculated that the 14 accounts paid US $651,405 in commissions and realized losses in excess of US $300,000.
(In 2017, a former Summit registered representative with the initials “CJ” – Christopher Jorgensen – was banned by FINRA after determining not to appear before FINRA for required on-the-record testimony. (Click here to access FINRA’s relevant Letter of Acceptance, Waiver and Consent.))
FINRA also charged that, from January 2015 through March 2018, Summit failed to supervise the distribution of consolidated reports of customer assets held away from the firm at other brokers.
To resolve this matter, Summit agreed to pay a fine of US $325,000 and restitution to customers totaling US $558,296.