Wells Fargo deja vu? Firm dinged for compliance issue 7 years after similar regulatory reproach

Register now

The SEC penalized Wells Fargo $35 million over its recommendations of an investment product that had already gotten the firm into hot water with FINRA seven years ago.

The product? Single-inverse ETFs.

Wells Fargo got dinged for advisors’ recommendations that allegedly led some clients to hold a product for months or years that typically should not have been held beyond a single day, according to the regulator.

It’s the latest, but by no means, biggest regulatory penalty the bank has faced recently. Last week, the bank agreed to pay $3 billion to several regulators, including the SEC, to settle criminal and civil charges related to a widespread fake accounts scandal.

In the latest regulatory action, the SEC claims two Wells Fargo business units — Wells Fargo Clearing Services and Wells Fargo Advisors Financial Network — failed to properly supervise advisors and registered representatives who recommended single-inverse ETF investments to retail investors.

Single-inverse ETFs seek investment results that are the opposite of the performance of an index for a short trading period, often a single day, the SEC says. When held for longer than a day, the investments will lose money when the level of the index is flat.

Wells Fargo and its advisors recommended some clients buy and hold these investments for much longer than a single day — in some cases for months or years, the SEC says. Some investors had little understanding of the risks associated with single-inverse ETFs.

So too, did some Wells Fargo financial advisors, who “did not adequately understand the products or properly monitor the positions,” the SEC says in its regulatory order, which criticized Wells Fargo’s training for advisors and supervisors.

In one January 2016 incident, a financial advisor asked questions about single-inverse ETFs to an analyst who wrote back (and included a sad-face emoji): “[S]olely based on its 2015 performance… one may have (incorrectly) guessed that [the single-inverse ETF] was a triple-inverse geared ETF. 🙁 Again, high volatility is toxic for geared ETPs, even for a non-leveraged inverse ETF.”

The bank’s alleged failures lasted from April 2012 through September 2019, a period during which “clients collectively sustained millions of dollars of losses in the product by holding the positions,” according to the SEC.

FINRA previously sanctioned Wells Fargo for similar conduct prior to July 2009. In a 2012 settlement, Wells Fargo paid over $2.7 million in fines and restitution and said it would enhance supervisory processes and training. But the bank’s policies and procedures with regard to single-inverse ETFs were still lacking, the SEC says.

“Wells Fargo did not require training on these products for its financial advisors and supervisors, or take other reasonable steps to educate financial advisors so they sufficiently understood the products to recommend them to clients,” the commission says.

In some instances, the bank failed to properly implement its own policies, according to the SEC. For example, Wells Fargo had a policy that non-traditional ETFs that reset daily typically should not be held longer than one trading session. Yet, “the firm recommended to more than 40,000 retail non-discretionary and discretionary advisory accounts and more than 2,000 retail brokerage accounts that they buy single-inverse ETFs with daily resets,” the SEC says. Many of these investment products were held months or years.

Without admitting or denying the findings, Wells Fargo agreed to pay the $35 million penalty and distribute the funds to affected clients, according to the SEC’s order.

A Wells Fargo spokeswoman confirmed the SEC settlement and said the company “no longer sells these products in the full-service brokerage.”

For reprint and licensing requests for this article, click here.
Penalties and fines Regulatory actions and programs SEC FINRA Wells Fargo Advisors Financial Network Wells Fargo Advisors Wells Fargo ETFs Compliance