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FINRA Orders Wells Fargo to Pay $3.4M Over Volatility-Linked ETPs

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Wells Fargo’s woes continue unabated.

The Financial Industry Regulatory Authority on Monday ordered Wells Fargo Clearing Services LLC and Wells Fargo Advisors Financial Network LLC to pay more than $3.4 million in restitution to affected customers for unsuitable recommendations of volatility-linked exchange-traded products (ETPs) and related supervisory failures.

Between July 1, 2010, and May 1, 2012, certain Wells Fargo registered representatives recommended volatility-linked ETPs without fully understanding their risks and features, FINRA found.

Also on Monday, the self-regulator issued Regulatory Notice 17-32 to remind firms of their sales practice obligations relating to these products as well as the unique features and risks of volatility-linked ETPs.

The action is the first case FINRA has brought against a firm involving ETP volatility. Wells Fargo neither admitted nor denied the charges but consented to the entry of FINRA’s findings.

According to FINRA, Wells Fargo reps “mistakenly believed that the products could be used as a long-term hedge on their customers’ equity positions in the event of a market downturn.”

However, as FINRA points out, volatility-linked ETPs “are generally short-term trading products that degrade significantly over time and should not be used as part of a long-term buy-and-hold investment strategy.”

Susan Schroeder, executive vice president of FINRA’s Department of Enforcement, said in a statement that FINRA “seeks restitution when customers have been harmed by a member firm’s misconduct,” adding that “We also credit firms that proactively detect and correct issues prior to detection by FINRA, as Wells Fargo did in this matter.”

Firms soliciting sales of volatility ETPs “should already be well aware of the unique risks that they pose – but FINRA’s Regulatory Notice 17-32 is intended to further educate the industry so that member firms can assess their own practices and take appropriate remedial action if necessary.”

FINRA also noted that firms should review its earlier guidance about heightened supervision of complex products set forth in Regulatory Notice 12-03.

According to FINRA’s order, Wells Fargo failed to implement “a reasonable system to supervise solicited sales of these products during the relevant time period. However, FINRA found that Wells Fargo took remedial action to correct its supervisory deficiencies in May 2012, prior to detection by FINRA and around the time that the firm was fined for similar violations relating to sales of leveraged and inverse ETPs.”

In addition, Wells Fargo provided “substantial assistance to FINRA’s investigation by, among other things, engaging a consulting firm to determine the appropriate restitution to be provided to affected customers,” the self-regulator said.

FINRA “took Wells Fargo’s previous corrective actions and cooperation into account when assessing the sanctions in this matter, and encourages member firms to assess their own sales and supervision of volatility ETPs.”

— Check out FINRA Plans BrokerCheck Changes, Remote Exams on ThinkAdvisor.


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