Summit Financial Group, Inc. Settles Charges

On November 13, 2020, Summit Financial Group, Inc. settled charges that it failed to adopt and implement policies and procedures reasonably designed to prevent unsuitable investments in volatility-linked exchange traded products (“ETPs”). As a result, Summit’s IARs recommended to their clients that they purchase and hold one of the ETPs for durations that were inconsistent with the purpose of the product, as described in its offering documents.  Beginning in early 2016, certain Summit Financial IARs expected the financial markets would experience volatility and potential decline over the coming year. In response, these representatives recommended that their clients invest long term in a security called iPath S&P 500 VIX Short–Term Futures ETN (“VXX”) as a hedge, or as a means to profit, should the anticipated market decline occur. VXX is designed to provide exposure to equity market volatility by replicating a strategy of continuously maintaining a rolling portfolio of one and two-month futures contracts on the CBOE volatility index (the “VIX”). However, as disclosed in the VXX offering documents, the constant daily buying and selling of the VIX futures contracts generates roll costs in most instances. As these roll costs are deducted from VXX’s returns, its value was likely to— and, in fact, did—decrease when held for longer than very short periods, even if the VIX remained flat or positive during that period.  In 2016 and 2017, at least 92 Summit Financial advisory client accounts held VXX for periods extending to several months and, in certain instances, more than a year. The increased risk from the extended holding periods resulted in meaningful losses in 91 of these accounts.  Summit Financial maintained policies and procedures requiring its IARs to make only suitable investment recommendations. The firm’s policies and procedures also mandated that its IARs receive training to address the investment features and risk factors of recommended products. Notwithstanding these obligations, Summit Financial failed to adopt adequate procedures reasonably designed to prevent unsuitable recommendations of volatility-linked ETPs like VXX, and also failed to implement its policy requiring adequate training concerning the investment features and risks of the products that its IARs recommended. Summit agreed to pay a total of $603,799 of disgorgement, which $600,000 is a penalty and disgorgement of about $3,000.   []