FINRA Fines Summit Equities $325,000 for Variable Annuity-related Supervisory Failures, IME Fund Collapse

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FINRA censured and fined Summit Equities, Inc. $325,000 for failing to supervise variable annuity (VA) share class recommendations and for similar supervisory failures related to private securities transactions and the collapsed hedge fund IME Fund, which former broker Donald Kay Gross II sold away from the firm. FINRA also found that Summit Equities failed to adequately guide firm personnel as to suitability considerations for sales of different VA share classes, including its sales of L-share contracts.

FINRA AWC #2015043159201 (Summit Equities)

FINRA AWC #2013039548401 (Donald Kay Gross)

In reviewing over 1,000 individual VA contracts, 45% of which were L-share contracts, investigators quickly surmised that VA sales played a "significant role" in Summit Equities' overall business, but also found that the firm failed to implement an adequate supervisory system and procedures that would ensure suitability of its multi-share class VA sales.

Most notably, FINRA reviewed Summit Equities' sales of multi VA share classes—namely the seven-year surrender B-share contracts and three-to-four year surrender period L-Share contracts, which exchange higher fees (typically between 35 and 50 basis points higher) for the increased liquidity provided by the shorter surrender period.

Investigators noted that L-share contracts are designed for investors who want the option to surrender sooner than the extended term featured in a B-share contract. Thus, all else equal, an investor who holds an L-share contract for the entire surrender period will pay a higher annual fee for the life of the contract.

FINRA found that the firm failed to provide training or guidance relative to multi-share class VA suitability for certain investors, such as the combination of long-term income riders with L-share contracts.

Investigators also cited Summit Equities for failing to supervise ex-broker Donald Kay Gross (CRD #1913749), who used a separate broker-dealer in order to sell securities of multiple hedge funds other than one that Summit Equities had previously approved.

The AWC indicates that in all, Gross sold $6.2 million in limited partnership interests in IME Fund, which was a hedge fund that traded options, and never timely disclosed the sales to Summit Equities.

When IME Fund ultimately collapsed, investors lost approximately 95% of their investments. In October 2016, Summit Equities permitted Gross to resign in an "employment separation after allegations" disclosure, after which FINRA suspended Gross until November 2018 for his misconduct.

FINRA wrote that Summit Equities missed several red flags about the IME Fund activity, such as several multi-million dollar wire transfer requests that the firm approved without questioning the associated broker about the transactions.

If you have invested with Summit Equities in variable annuity B- or L-share contracts, with Donald Kay Gross, or another broker or financial adviser whose unsuitable recommendations, selling away activity, or other misconduct has proven harmful to your investments or interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.