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December 15, 2011 at 08:15 AM
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.
