FINRA ordered Wells Fargo to pay more than $3.4 million in restitution to clients for unsuitable recommendations and supervisory failures related to volatility-linked exchange-traded products, the regulator said Monday.
The penalty could have been stiffer; FINRA credited Wells Fargo with providing "substantial assistance" to its investigation, adding that it took the bank's actions into account when assessing the matter.
In sanctioning the bank, FINRA singled out two units: Wells Fargo Clearing Services and Wells Fargo Advisors Financial Network, the firm's independent broker-dealer. Combined, they have nearly 11,000 registered representatives.
More than 1,300 clients were affected, according to FINRA.
RISK PROFILES IGNORED
Wells Fargo brokers recommended the complex investments from 2010 to 2012 without fully understanding their risks, FINRA said. Though volatility-linked ETPs are generally short-term trading products, some Wells Fargo brokers thought they could be used as a long-term hedging device on client's equity positions in the event of a market downturn.
The bank placed no restrictions on recommendations and purchases of volatility ETPs from 2009 to May 2012, FINRA's investigation found. The investments were available to retail brokerage clients regardless of risk profile and investment objectives.
However, FINRA says though the firm initially failed to implement reasonable supervisory practices, Wells Fargo corrected the deficiencies in May 2012.
As part of its settlement with the regulator, Wells Fargo neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
"In cooperating fully with FINRA, we have made significant policy and supervision changes, including the discontinuation of the ETPs in focus," a Wells Fargo spokeswoman said.
Wells Fargo's errors spurred FINRA to issue a new regulatory notice, cautioning other brokerages to review their guidance to brokers about volatility-linked ETPs, the regulator said.
Register or login for access to this item and much more
All Financial Planning content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access