by Howard Haykin

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.

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.

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.