The Financial Industry Regulatory Authority fined Wells Fargo Advisors $175,000 and censured the firm for allegedly failing to properly supervise an ex-representative who was accused of excessively trading equity positions in three trust accounts of an 88-year-old client, according to FINRA.
Without admitting or denying the findings, Wells Fargo Advisors Chief Operating Officer Erik Karanik, in late January, signed a FINRA letter of acceptance, waiver and consent in which his company agreed to the sanctions. FINRA accepted the letter Jan. 29.
“Our primary goal is to be a trusted advisor for our clients and do what is best for their needs,” Wells Fargo spokeswoman Jackie Knolhoff told ThinkAdvisor on Monday. “We have supervisory processes and controls in place across all channels so that, if a team member or affiliated advisor acts in a manner not in line with our values and our policies, we take action,” it said, adding: “The advisor and managers involved in this matter are no longer with the firm.” Like FINRA, Wells Fargo didn’t identify the rep.
Between March 2012 and March 2016, Wells Fargo violated NASD supervisory Rule 3010(a) (for conduct before Dec. 1, 2014) and FINRA supervisory rules 3110(a) (for conduct on or after Dec.1, 2014) and 2010 by “failing to reasonably supervise the rep who excessively traded equity positions in three accounts belonging to a senior customer,” according to the FINRA letter.
During that period, the Wells Fargo-registered rep excessively traded in three trust accounts owned, when the excessive trading started, by an 88-year-old client that the regulator identified only as “JZ.” The rep “placed more than 2,000 trades in JZ’s three accounts and JZ paid at least $300,000 in commissions and other fees,” according to FINRA.
The firm used a computer program to identify red flags of unsuitable trading using risk-based criteria including velocity, which the firm defined as annualized commissions and fees, divided by the equity in the account. The firm’s written supervisory procedures required it to conduct customer interviews to address red flags in the event of inconsistencies in account activity, and when accounts were repeatedly identified by the system for review, including specifically any account flagged for six consecutive months, FINRA said.
The firm’s computer program flagged JZ’s three accounts for high velocity a total of 40 times during the period. However, the firm “did not reasonably address these flags,” according to FINRA.
As an example, the regulator pointed out that, between November 2013 and April 2014, the firm’s computer program “flagged two of JZ’s accounts for high velocity on a monthly basis for six consecutive months,” but Wells Fargo “did not contact JZ until May 2014, according to FINRA. In May 2014, the firm contacted JZ, but did not say it was doing so because it detected high velocity in her account, FINRA said.
The firm also “did not address JZ’s investment profile or the account’s performance, and did not make a reasonable inquiry to determine whether the transactions that resulted in the firm’s electronic alerts were recommended to JZ, or whether she understood the implications of the trading,” according to FINRA.
The same occurred with one of JZ’s accounts between July 2014 and February 2015, with a similar response by Wells Fargo, according to FINRA.
In August 2015, one of JZ’s accounts was again flagged for high velocity by the firm’s computer program. However, Wells Fargo did not contact JZ to investigate the August 2015 flag for high velocity until April 2016, FINRA said.
Following its investigation, Wells Fargo discharged the registered representative responsible for JZ’s accounts on Sept. 2, 2016. Ultimately, it paid $1 million in restitution to JZ in a settlement, FINRA said.
— Check out SEC Says Former Advisor Stole $2.4M From Elderly Clients on ThinkAdvisor.