Wells Fargo fined by SEC for ‘flipping’ complex investments
Wells Fargo will pay more than $5.1 million to settle SEC charges claiming employees pushed clients to sell complex financial products that led to substantial fees and reduced returns for investors.
Wells Fargo advisors improperly encouraged clients to actively trade products in market-linked investments, which were meant to be held to maturity, according to the SEC order. Although the wirehouse had an internal guidance policy that prohibited “short-term trading” or “flipping” of MLIs, advisors routinely recommended clients cash in their holdings and use the profits to purchase new ones, the regulator says.
Some 308 accounts were affected between 2009 and 2013, according to the firm.
“This practice caused certain WFA customers to incur significant costs and impaired the customers’ ability to achieve their investment objectives,” according to the SEC order.
Wells Fargo agreed to pay a $4 million penalty and return $930,377 of ill-gotten gains plus $178,064 in interest. The San Francisco-based firm also agreed to a censure and to cease and desist from committing or causing any future violations.
“It is important that brokers do their homework before they recommend that their retail customers buy or sell complex structured products,” says Daniel Michael, chief of the SEC’s Complex Financial Instruments Unit. “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.”
Although the order notes instances where customers redeemed early at a loss, the vast majority of the sales resulted in profits, says a Wells Fargo spokesman. Just two financial advisors were identified as having “engaged in a systematic practice of soliciting customers.”
“We are committed to helping our clients achieve their investment goals and cooperated fully with the SEC’s investigation. We previously made policy and supervision changes related to this matter to improve internal controls,” says a firm spokesman.
Wells Fargo neither admitted nor denied the allegations.
The firm is considering restructuring its wealth-management business as the bank looks to cut costs by $4 billion by the end of next year. The wirehouse has lost at least 80 advisors managing over $12 billion in client assets year-to-date, according to hiring announcements. Advisor headcount fell by 258 advisors year-over-year, with brokers leaving for regional and independent rivals, according to the company’s earnings statement.
The beleaguered bank has been plagued for nearly two years by scandals over how it treated its customers, including selling them products they did not need to meet internal sales goals. The bank disclosed new federal scrutiny regarding other possible incidents of sales misconduct within the firm’s wealth management unit in March — the latest in a series of similar revelations.