For alleged supervisory failures and excessive trading by one of its former brokers, Summit Brokerage Services, Inc. has been ordered to pay over $880K– $558K in restitution with interest to customers that were harmed, as well as a $325K fine to the Financial Industry Regulatory Authority (FINRA). The broker-dealer consented to the entry of the findings but did not admit to or deny wrongdoing.
According to the SRO, from 1/2012 to 3/2017, Summit neglected to review certain automated alerts for the trading activities of its registered representatives, of which there are more than 700. Because of this, one of its brokers, was able to excessively trade in accounts belonging to 14 clients, including 533 trades on behalf of one customer. This compelled her to pay over $171K in commissions.
The broker’s excessive trading resulted in 150 alerts for this type of activity, none of which were purportedly reviewed by Summit. FINRA has since barred the former registered rep.
Speaking about the Summit case, FINRA Department of Enforcement EVP Susan Schroeder said that as a result of the former broker’s alleged excessive trading, the firm’s clients paid hundreds of thousands of dollars in commissions.
Excessive Trading
Also known as “churning,” excessive trading typically involves a broker trading excessively in a client’s account for the purpose of making more commissions. Churning usually does not support the customer’s investment goals or the degree of risk that the portfolio can handle. It can, however, lead to losses for the investor and not just in the commissions paid for the unwarranted transactions. Excessive trading is a breach of fiduciary duty by the registered representative and is considered fraudulent behavior.
Inadequate Supervision
FINRA also said that between 6/2015 and 3/2018, Summit neglected to reasonably supervise the way its representatives utilized consolidated reports, which are given to customers and are supposed to provide a summary of their respective holdings. While the brokerage firm mandated that its representatives send these reports in a specific template–and the reports were to be reviewed and approved–Summit is accused of not having put in place a “reasonable system” that would have allowed it to ensure that representatives were in compliance.
As a result, contends the SRO, of the 100 Summit brokers that issued consolidated reports to clients, only the submissions of 8 were reviewed and approved. One Summit rep. sent a consolidated report that “materially misstated” an investment to one customer.
Inadequate Supervision
Even if a brokerage firm was not involved in a registered representative’s fraudulent activities, a failure to supervise by the firm can be grounds for claims by investors that were harmed by the fraud, as well as sanctions by regulators. Inadequate supervision may involve:
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- Not directly supervising a broker.
- Inadequately training a representative.
- Failing to implement and execute the proper supervisory systems and processes.
- Ignoring red flags of possible misconduct.
- Not making sure brokers are properly registered.
- Other negligent actions.
If you were represented by a Summit broker and you suspect your losses may be due to churning, or another fraudulent or negligent activity, you may have grounds for an investor claim against the brokerage firm and/or broker. Contact Shepherd Smith Edwards and Kantas, LLP (SSEK Law Firm) today and ask to speak with one of our broker misconduct lawyers.