FINRA Whacks Wells Fargo, Merrill Lynch $5M Over Unsuitable Floating-Rate Bank Loan Funds

Firms were fined $2.15 million and ordered to pay $3 million in restitution to customers

More On Legal & Compliance

from The Advisor's Professional Library
  • Differences Between State and SEC Regulation of Investment Advisors States may impose licensing or registration requirements on IARs doing business in their jurisdiction, even if the IAR works for an SEC-registered firm.  States may investigate and prosecute fraud by any IAR in their jurisdiction, even if the individual works for an SEC-registered firm.
  • Advertising Advisor Services and Credentials Section 206 of the Investment Advisers Act contains the anti-fraud provision of the statute and ensures that RIAs’ advertising and marketing practices are consistent with the fiduciary duty owed to clients and prospective clients.   

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.

---

Read Which State’s Residents Are Smartest With Money? on AdvisorOne.

Reprints Discuss this story
This is where the comments go.