Wells Fargo Broker-Dealers to Pay $3.4 M in Restitution

 

The Financial Industry Regulatory Authority (FINRA) has ordered Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC to pay more than $3.4 million in restitution to affected customers for unsuitable recommendations of volatility-linked exchange-tra ded products (ETPs) and related supervisory failures.

FINRA found that between July 1, 2010, and May 1, 2012, some Wells Fargo registered representatives recommended ETPs without fully understanding their risks and features.

Volatility-linked ETPs are complex products. Registered Representatives can misunderstand and improperly sell ETP’s.  Volatility-linked ETPs are usually a short-term trading product and should not be used as a long-term buy-and-hold strategy.  Some of Wells Fargo representatives inaccurately believed that ETPs could be used as a long-term hedge for their customers’ equity position in the event of a downturn in the market.

FINRA issued a Regulatory Notice 17-32 to remind firms of their sales practice obligations to these products because of their unique features and risks.  FINRA also encouraged member firms to review the earlier guidance about heightened supervision of complex products in Regulatory Notice 12-03.

“FINRA found that Wells Fargo failed to implement a reasonable system to supervise solicited sales of these products during the relevant time period. However, FINRA found that Wells Fargo took remedial action to correct its supervisory deficiencies in May 2012, prior to detection by FINRA and around the time that the firm was fined for similar violations relating to sales of leveraged and inverse ETPs. In addition, Wells Fargo provided substantial assistance to FINRA’s investigation by, among other things, engaging a consulting firm to determine the appropriate restitution to be provided to affected customers. FINRA took Wells Fargo’s previous corrective actions and cooperation into account when assessing the sanctions in this matter, and encourages member firms to assess their own sales and supervision of volatility ETPs.”

“FINRA seeks restitution when customers have been harmed by a member firm’s misconduct,” stated Susan Schroeder, Executive Vice President of FINRA’s Department of Enforcement. “We also credit firms that proactively detect and correct issues prior to detection by FINRA, as Wells Fargo did in this matter. Firms soliciting sales of volatility ETPs should already be well aware of the unique risks that they pose – but FINRA’s Regulatory Notice 17-32 is intended to further educate the industry so that member firms can assess their own practices and take appropriate remedial action if necessary.”

In settling with FINRA, Wells Fargo neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

FINRA’s News Release