Finra orders Wells Fargo to pay $3.4 million over risky ETFs and ETNs

Regulator reminds firms of their duty to understand volatility-linked products and supervise how they are sold

Oct 16, 2017 @ 12:03 pm

By InvestmentNews

The Financial Industry Regulatory Authority has ordered Wells Fargo's clearing and retail brokerage units to pay more than $3.4 million in restitution to customers affected by the B-Ds' unsuitable recommendations of volatility-linked exchange-traded funds and notes, as well as related supervisory failures.

Finra found that between July 1, 2010, and May 1, 2012, certain Wells Fargo reps recommended volatility-linked ETFs and ETNs without fully understanding their risks and features. Through leverage and other strategies, the prices of these securities are intended to magnify the impact of price movements, sometimes inversely, in a basket of underlying securities.

In a release, Finra said that volatility-linked exchange-traded products are complex products that brokers could misunderstand and improperly sell. Certain Wells Fargo representatives mistakenly believed that the products could be used as a long-term hedge on their customers' equity positions in the event of a market downturn, Finra said.

In fact, volatility-linked exchange-traded products are generally used as short-term holdings that degrade significantly over time and should not be used as part of a long-term buy-and-hold investment strategy. Because of these risks, Finra said it issued a regulatory notice to remind firms of their sales practice obligations relating to these securities.

Finra said it found that Wells Fargo failed to implement a reasonable system to supervise solicited sales of these products during the relevant time period.

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