More On Legal & Compliancefrom The Advisor's Professional Library
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
- 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 Financial Industry Regulatory Authority announced Tuesday that it had fined Wells Fargo Advisors and Merrill Lynch a total of $2.15 million and ordered the firms to pay more than $3 million in restitution to customers for losses incurred from unsuitable sales of floating-rate bank loan funds from 2007 to 2008.
FINRA ordered Wells Fargo Advisors, the successor firm for Wells Fargo Investments, to pay a fine of $1.25 million and to reimburse approximately $2 million in losses to 239 customers, while Merrill Lynch, a successor of Banc of America Investments, was ordered to pay a fine of $900,000 and to reimburse approximately $1.1 million in losses to 214 customers.
Wells Fargo and Bank of America neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
Floating-rate bank loan funds are mutual funds that generally invest in a portfolio of secured senior loans made to entities whose credit quality is rated below investment grade. The funds, FINRA says, are subject to significant credit risks and can also be illiquid.
FINRA found that Wells Fargo and Bank of America brokers recommended concentrated purchases of floating-rate bank loan funds to customers whose risk tolerance, investment objectives and financial conditions were inconsistent with the risks and features of floating-rate loan funds.
The customers “were seeking to preserve principal, or had conservative risk tolerances, and brokers made recommendations to purchase floating-rate loan funds without having reasonable grounds to believe that the purchases were suitable for the customers,” FINRA said.
“As investors continue to look for yield in a low-interest-rate environment, these actions should serve as a reminder that brokers and their firms need to ensure that investment recommendations are consistent with customers’ investment objectives and risk tolerances,” said Brad Bennett, FINRA’s vice president and chief of enforcement, in a statement. “Wells Fargo and Banc of America allowed their brokers to sell floating-rate bank loan funds to investors for whom the positions were unsuitable, resulting in significant losses to many customers.”
FINRA also found that the firms failed to train their sales forces on the unique risks and characteristics of the funds, and failed to reasonably supervise the sales of floating-rate bank loan funds.
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