Welcome to Financial Advisor IQ

Wells Fargo to Return $3.4M Over Sales Practices

October 17, 2017

Finra has ordered Wells Fargo to pay restitution to clients over unsuitable sales of volatility-linked exchange-traded products, according to a press release from the industry’s self-regulator.

Wells Fargo Clearing Services and Wells Fargo Advisors Financial Network must return more than $3.4 million tied to volatility-linked ETP sales their reps made from July 1, 2010, to May 1, 2012, Finra says. The regulator alleges some FiNet advisors didn’t understand the risks associated with the product and peddled it under the wrong assumption that they could hedge the clients’ equity investments in case of a falling market. But volatility-linked ETPs aren’t suitable for long-term investing because they’re geared toward short-term trading and are liable to lose value over time, according to Finra.

The regulator also found that Wells Fargo lacked an adequate supervisory system to monitor the sales. But the firm took measures to address the problems prior to Finra’s detection of the practice, around the time it was fined for similar deficiencies tied to the sales of leveraged and inverse ETPs, according to the regulator. Wells Fargo cooperated with Finra’s investigation, hiring an outside firm to determine the restitution due to its affected clients, according to the press release. In all, about 1,300 customers were affected, according to Reuters. Wells Fargo didn’t admit or deny the charges in accepting the fine.

Finra also issued a regulatory notice reminding firms that reps must fully understand the features and risks of volatility-linked ETPs and that the companies must ensure accuracy of all sales materials and have adequate supervisory procedures to monitor the sales.

Wells Fargo’s fine over volatility-linked ETPs suggests that “problematic sales practices” at Wells Fargo’s retail banking unit take place at other divisions of the firm, Reuters writes. The bank settled with regulators for a $190 million last year over revelations that its bank reps opened millions of bogus credit and debit accounts without clients’ knowledge, and the practice has since turned out to be far wider in scope. Such aggressive practices haven’t impacted the company’s wealth management division, Wells Fargo Advisors, however, according to Reuters.

An internal review found that the bank’s scandal didn’t affect Wells Fargo’s wealth management unit, Wells Fargo CEO Tim Sloan told analysts on a call about Wells Fargo’s third-quarter earnings, according to the newswire. The wealth unit also seems to have halted an exodus of advisors since the scandal, adding 37 new advisors in the most recent quarter, although the 14,564 reps it had at the end of September was still down 3.5% compared to the year prior.

By Alex Padalka
  • To read the Reuters article cited in this story, click here.