Wells Fargo Advisors fined $4 million over complex product sales

Firm will also pay $1.1 million in restitution after SEC finds improper sales of market-linked securities

Jun 25, 2018 @ 4:51 pm

By Bruce Kelly

The Securities and Exchange Commission on Monday said it had fined Wells Fargo Advisors $4 million and ordered the firm to pay $1.1 million in restitution stemming from the sale of complex products called market-linked investments to retail investors.

From January 2009 to June 2013, certain registered reps at Wells Fargo Advisors improperly solicited clients to redeem their market-linked investments before maturity and purchase new, similar products without adequate analysis of the costs and fees of flipping such investments, according to the SEC settlement.

Market-linked investments have a fixed maturity whose interest is determined by the performance of a market measure such as an equity or commodity index over the lifespan of the product. Such investments have limited liquidity and significant upfront fees, according to the SEC.

Wells Fargo Advisors considered them products intended to be held to maturity and in 2011 created a policy prohibiting brokers from engaging in flipping or short-term trading of the product, according to the SEC.

Certain brokers did not "reasonably investigate or understand the significant costs of [market-linked investment] exchanges," according to the SEC. Wells Fargo supervisors "routinely approved these transactions despite internal policies" that prohibited flipping and short-term trading of the products, the SEC said.

In the settlement, the SEC cites two unnamed brokers who engaged in the "systematic practice" of flipping the investments on hundreds of occasions. Meanwhile, the majority of Wells Fargo brokers who engaged their clients in the trades did so "relatively infrequently," according to the settlement.

The SEC settlement with Wells Fargo Advisors Monday is not related to the independent investigation the Department of Justice instructed Wells Fargo & Co. to conduct of its Wealth and Investment Management business, which includes Wells Fargo Advisors, after whistleblowers flagged "sales problems" in the unit. That investigation was revealed in March.

Wells Fargo Advisors neither admitted or denied the findings in the SEC's order.

"We are committed to helping our clients achieve their investment goals and cooperated fully with the SEC's investigation," company spokeswoman Shea Leordeanu wrote in an email. "We previously made policy and supervision changes related to this matter to improve internal controls."

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