Wells Fargo Advisors (WFA) has agreed to settle charges of misconduct in the sale of financial products known as market-linked investments (MLIs) to retail investors, the US Securities and Exchange Commission said today.
According to the US watchdog, Wells Fargo generated large fees by 'improperly encouraging retail customers to actively trade the products', which were intended to be held to maturity. As described in the SEC's order, the trading strategy - which involved selling the MLIs before maturity and investing the proceeds in new MLIs - generated substantial fees for Wells Fargo, which reduced the customers' investment returns.
According to the SEC, WFA began offering two types of MLIs to its customers in 2002 including market-linked certificates of deposit (MLCDs) and market-linked notes (MLNs). According to WFA product disclosures, the MLCDs sold by WFA were structured investments issued by WFB or in some cases a third-party issuer. WFA product disclosures also showed that MLIs were not suitable for short-term trading due to their limited liquidity while purchasers of MLIs should be buy-and-hold investors and that the products were generally suitable only for customers who were able to hold the investments until maturity.
SRP data shows that Wells Fargo is a top ten provider in the US market with over US$1.2bn in sales in 2017 across 317 structured products of which 46 were MLCDs and 271 were MLNs. Year to date, the firm has marketed 144 products worth US$498m.
The order also found that the Wells Fargo sales representatives involved did not 'reasonably investigate or understand the significant costs of the recommendations' while the firm's Wells Fargo supervisors routinely approved these transactions despite internal policies prohibiting short-term trading or "flipping" of the products.
'It is important that brokers do their homework before they recommend that their retail customers buy or sell complex structured products,' said Daniel Michael, chief of the enforcement division's complex financial instruments unit.
Michael also said that the products sold by Wells Fargo came with high fees and commissions, 'which Wells Fargo should have taken into account before advising retail customers to sell their investments and reinvest the proceeds in similar products'.
The regulator also found that prior to the integration of Wells Fargo Investments (WFI) and Wachovia in January 2011, WFI did not have a written policy expressly prohibiting or discouraging the practice of soliciting early liquidations of MLIs or MLI exchanges. 'However, as early as 2005, WFI compliance personnel were aware of the practice and took steps to curb the solicitation of early liquidations,' stated the regulator. 'Despite the implementation of the pre-approval process for early liquidations in 2009, certain WFI representatives continued to engage in MLI exchanges without meaningful supervision or guidance.'
Without admitting or denying the findings of the regulator, Wells Fargo agreed to return US$930,377 of ill-gotten gains plus US$178,064 of interest and to pay a US$4m penalty. Wells Fargo also agreed to a 'censure and to cease and desist from committing or causing any violations and any future violations of certain antifraud provisions of the federal securities laws'. The SEC acknowledged recognizes that Wells Fargo took remedial steps to address the allegedly improper sales practices.
Click in the link to read the SEC order.
Related stories:
Wells Fargo hires from BNP Paribas in New York
US regulators to deploy data analytics to prevent unsuitable sales, expand focus beyond structured notes