The Securities and Exchange Commission says Wells Fargo will pay $35 million over shortcomings with its investment recommendation practices.
The regulator charged Wells Fargo Clearing Services and Wells Fargo Advisors Financial Network with failure to supervise and train investment advisers and registered representatives recommending single-inverse ETF investments to retail investors; it also said the bank lacked adequate compliance policies and procedures tied to the suitability of these recommendations.
The latest settlement comes less that a week after Wells Fargo agreed to pay $3 billion to the SEC and Department of Justice to resolve potential criminal and civil charges tied to its fake-accounts scandals.
From April 2012 through September 2019, the bank’s policies and procedures “were not reasonably designed to prevent and detect unsuitable recommendations of single-inverse ETFs,” the SEC said late Thursday.
The regulator concluded that some Wells Fargo brokers and advisers didn’t “fully understand the risk of losses these complex products posed when held long term,” which led to some clients to buy and hold single-inverse ETFs for months or years. Plus, a number of the clients were senior citizens and retirees with limited incomes and net worth, and conservative or moderate risk tolerances.
Inverse exchange-traded funds use various derivatives to profit from a decline in the value of an underlying benchmark and/or to hedge a portfolio from a decline; they also are known as “short” or “bear” ETFs. Single-inverse ETFs, referred to as 1X (for “one times”) products, are 100% hedged vs. other products (2X and 3X), which are 200% and 300% hedged, respectively.
“Firms must maintain effective compliance and supervisory programs to ensure that the securities they recommend are suitable for their clients,” said Antonia Chion, associate director of the SEC Enforcement Division. “As a result of Wells Fargo’s failure to meet these important obligations, some of its employees recommended complex instruments to retail investors who did not understand the risks involved.”
Without admitting or denying the findings, the bank agreed to pay a $35 million penalty and distribute the funds to some clients who were recommended to buy single-inverse ETFs and suffered losses after holding the positions for longer periods, according to the SEC.
Its order also censures Wells Fargo and requires it to cease and desist from committing or causing any future violations of the relevant provisions.
“Wells Fargo Advisors settled claims with the U.S. Securities and Exchange Commission related to our policies and procedures and supervision of single-inverse exchange-traded funds (‘single-inverse ETFs’). Wells Fargo Advisors no longer sells these products in the full-service brokerage,” the bank said in a statement shared with ThinkAdvisor.