Securities and Exchange Commission says Wells Fargo Advisors agreed to a fine of $4 million and to pay investors about $1 million over charges of misconduct tied to sales of market-linked investments, or MLIs, from 2009 to 2013.
“It is important that brokers do their homework before they recommend that their retail customers buy or sell complex structured products,” said Daniel Michael, chief of the SEC Enforcement Division’s Complex Financial Instruments Unit, in a statement.
“The products sold by Wells Fargo came with high fees and commissions, which Wells Fargo should have taken into account before advising retail customers to sell their investments and reinvest the proceeds in similar products,” Michael added.
The SEC found that Wells Fargo “generated large fees by improperly encouraging retail customers to actively trade the products, which were intended to be held to maturity.” The trading strategy entailed selling the MLIs before maturity and investing these proceeds in new MLIs, which resulted in “substantial fees” for Wells Fargo and “reduced the customers’ investment returns.”
In addition, the regulatory group’s order concluded that the bank’s representatives “did not reasonably investigate or understand the significant costs of the recommendations.” In fact, supervisors “routinely approved these transactions despite internal policies prohibiting short-term trading or ‘flipping’ of the products.”
For its part, Wells Fargo—which neither admitted or denied the findings—said in a statement: “We are committed to helping our clients achieve their investment goals and cooperated fully with the SEC’s investigation. We previously made policy and supervision changes related to this matter to improve internal controls.”
WFA also explained that the order involved 308 acounts and that “the SEC found ‘the vast majority of early redemptions were executed at prices above par, resulting in profits’ for clients.”
In addition, Wells said most brokers that solicited clients to engage in MLI exchanges “did so relatively infrequently” and that only two were identified as having “engaged in a systematic practice of soliciting customers.”