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Regulation and Compliance > Federal Regulation > SEC

Advisors Sound Off on Wells Fargo’s Big Inverse ETF Failure

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The news that Wells Fargo agreed to pay the Securities and Exchange Commission $35 million over shortcomings in its recommendations of inverse ETFs has advisors riled up on social media.

It also returns the spotlight to troubled practices at the bank, which only recently said it would pay $3 billion to the SEC and Department of Justice to resolve potential criminal and civil charges tied to its fake-accounts scandals.

Michael Batnick, CFA, tweeted a statement from the latest SEC settlement early Monday: “Wells Fargo recommended that certain retail clients buy and hold, in many cases for months or years, single-inverse ETFs with daily reset features, including in retirement accounts.” (Batnick is head of research at Ritholtz Wealth Management, but posts on Twitter as “a long-distance reader.”)

In the SEC settlement, the regulator quoted from a January 2016 response from a Wells Fargo analyst to financial advisors’ questions about the performance of a single-inverse ETF: 

“[S]olely based on it[s] 2015 performance…one may have (incorrectly) guessed that [the single-inverse ETF] was a triple-inverse geared ETF. ☹ Again, high volatility is toxic for geared ETPs, even for a non-levered inverse ETF.”

At various points, the analyst had cautioned that single-inverse ETFs “were not intended for portfolio protection against an eventual downturn in the market and were misunderstood by investors,” the SEC said, but this guidance was not given to Wells Fargo advisors recommending the products.

As a result of Wells Fargo’s failings, its clients collectively “sustained millions of dollars of losses in the product by holding the positions,” according to the SEC. 

“What happens when greed and ignorance collide?” asked James Werner, a certified financial planner, in a tweet.

Overlooking Risk Issues

The SEC document added: “Some of these clients had little or no relevant investing experience and had been identified to Wells Fargo as clients with moderate or conservative risk tolerances.” 

“So many advisors have absolutely no business being a PM” or portfolio manager, tweeted Nick Sapienza, an advisor with Ritholtz. 

Plus, some clients didn’t fully grasp the risk of losses “when holding these inverse ETFs long term and were not aware of the need to, and therefore did not, actively monitor the positions,” the SEC explained. 

Similarly, some Wells Fargo financial advisors who recommended single-inverse ETFs from 2012 to 2019 did not adequately understand the products or properly monitor the positions, it added.

Tweeted CFP Joshua Duvall: “Sounds like normal run-of-the-mill financial planning stuff right? If you can’t understand it – you shouldn’t be investing in it.”

Repeat Behavior

This is not Wells Fargo’s first fine tied to recommendations of inverse ETFs.  

In May 2012, Wells Fargo Advisors, Wells Fargo Financial Network and Wells Fargo Investments were sanctioned by the Financial Industry Regulatory Authority and paid over $2.7 million in fines and restitution for similar conduct before July 2009, the SEC said.

“In connection with Wells Fargo’s settlement of that action in 2012, Wells Fargo publicly stated it had enhanced its policies and procedures and had appropriate supervisory processes and training to meet its regulatory responsibilities and clients’ investment needs,”  according to the SEC. “Wells Fargo also failed to adequately implement the policies and procedures it had in place. Wells Fargo’s misconduct continued through September 2019.”

The bank said last week that Wells Fargo Advisors no longer sells single-inverse ETFs in its full-service brokerage.


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