More On Legal & Compliancefrom The Advisor's Professional Library
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
FINRA announced Thursday that it has fined Wells Fargo Investments $2 million over the sales of unsuitable reverse convertibles to the elderly and a failure to provide breakpoints on unit investment trust sales.
Reverse convertibles are interest-bearing notes in which repayment of principal is tied to the performance of an underlying asset, such as a stock or basket of stocks. Depending on the specific terms of the note, an investor may sustain a loss if the value of the underlying asset falls below a certain level at maturity or during the term of the note.
UITs offer sales charge discounts on purchases exceeding certain thresholds ("breakpoints") or involving redemption or termination proceeds from another UIT during the initial offering period. Between January 2006 and July 2008, according to FINRA, Wells Fargo failed to provide certain eligible customers with these "breakpoint" and "rollover and exchange" discounts.
Brad Bennett, FINRA executive vice president and chief of enforcement, said in a statement, "Wells Fargo failed to review reverse convertible transactions to ensure they were suitable and also did not provide sales charge discounts to eligible customers purchasing unit investment trusts, both serious failings that harmed investors."
According to FINRA, the reverse convertible sales were made through one broker, Alfred Chi Chen, to 21 different customers; the authority has also filed a complaint against Chen for that and for unauthorized trades in several customer accounts, including the accounts of deceased customers. FINRA said Chen recommended hundreds of unsuitable reverse convertible investments to the 21 clients, 15 of whom were over 80 years old; most of the 21 also had limited investment experience and low risk tolerance.
As of June 2008, Chen had 172 accounts that held reverse convertibles; 148 had concentrations greater than 50% of total holdings, and 46 had greater than 90%. The transactions exposed these customers to risk inconsistent with their investment profiles, and resulted in overly concentrated reverse convertible positions in their accounts.
FINRA also found that the company’s failure to provide certain eligible customers with breakpoint and rollover and exchange discounts in their sales of UITs was due to insufficient systems and procedures to monitor for unsuitable reverse convertible sales and to ensure that UIT customers received discounts for which they were entitled.
Wells Fargo neither admitted nor denied the charges, but consented to the entry of FINRA's findings. As part of the settlement, Wells Fargo must pay restitution to customers who did not receive UIT sales charge
The company issued a statement that said, “The issue involves conduct at a legacy firm which has been merged into Wells Fargo Advisors. Wells Fargo Advisors will continue to support the processes and procedures in place to prevent this kind of activity from happening. We are glad to have this behind us.”
This is not the first time FINRA has interceded on behalf of the elderly. Just last month, as reported by AdvisorOne.com, the agency warned broker-dealers to be sure that their supervisory procedures regarding use of certifications and designations in advising senior investors are in order through a Notice to Members.
Citing Regulatory Notice 07-43, FINRA warned, “Firms that allow the use of any title or designation that conveys an expertise in senior investments or retirement planning where such expertise does not exist may violate FINRA Rule 2010, NASD Rule 2210, NYSE Rule 472, and possibly the anti-fraud provisions of the federal securities laws and FINRA rules.”