Wells Fargo Clearing Services and Wells Fargo Advisors Financial Network agreed to pay more than $2 million in combined restitution and fines for failing to supervise its reps’ recommendations that clients shift from variable annuities to more costly investment company products, the Financial Industry Regulatory Authority said Wednesday.
The two Wells Fargo divisions will pay more than $1.4 million in restitution, plus interest, to about 100 clients and fines totaling $675,000, FINRA said.
Without admitting or denying the findings, Wells Fargo Advisors CEO Jim Hays and Wells Fargo Advisors Financial Network President Kent Christian signed the same FINRA letter of acceptance, waiver and consent in which they agreed that Wells Fargo Clearing Services will pay $1.4 million plus interest in restitution to clients and a $625,000 fine, while Wells Fargo Advisors Financial Network will pay $90,000 plus interest and a $50,000 fine.
Hays signed the letter Thursday and Christian signed the letter Aug. 21. FINRA accepted the letter Tuesday.
“At Wells Fargo Advisors we take our supervisory responsibilities seriously,” Wells Fargo spokeswoman Shea Leordeanu told ThinkAdvisor by email Wednesday.
“Affected clients will receive restitution, plus interest,” she said, adding: “We enhanced our platforms in August 2016 to include additional oversight measures confirming investment suitability. We are pleased to have this matter behind us as the conduct at issue occurred between January 2011 and August 2016.”
From January 2011 through August 2016, Wells Fargo failed to supervise the suitability of recommendations that its clients sell a variable annuity and use the proceeds to buy one or more investment company products, such as mutual funds or unit investment trusts, according to FINRA.
“In spite of directives in the firms’ supervisory procedures that supervisors review the suitability of any product switch by considering the comparative costs and benefits associated with the new and existing products, the firms did not obtain from variable annuity issuers data sufficient to review the suitability of variable annuity surrenders and subsequent switches, including surrender fees,” FINRA alleged.
Wells Fargo’s procedures also “required the firms to send switch letters to clients, which would have confirmed customers’ understanding of the transaction, as well as related risks and expenses,” FINRA said.
Although the procedures required that such letters be sent “automatically … based on alerts generated by [the firms’] supervisory system[s], unless withheld by the qualified supervisor,” FINRA claimed the firms “did not, in fact, have a switch alert to identify switches from variable annuities to investment company products during the relevant period and the firms did not send switch letters to affected customers.”
As a result, between January 2011 and August 2016, Wells Fargo’s representatives “recommended at least 101 potentially unsuitable switches that required customers to incur both surrender fees and substantial new sales charges,” FINRA alleged.
For example, one former Wells Fargo rep recommended that a client liquidate a variable annuity with a surrender value of $126,681—which caused that client to pay a surrender fee of $5,070 — and then use the proceeds to buy class A mutual funds with upfront sales charges totaling $5,531, according to FINRA.
In addition to causing that client to incur $10,601 in surrender fees and upfront sales charges, the recommended switch resulted in the client earning less annual income than she would have earned had she not sold the variable annuity, FINRA alleged.
“Firms must have a reasonable supervisory system in place to detect potentially unsuitable switches,” Jessica Hopper, executive vice president and head of FINRA’s Department of Enforcement, said in announcing the disciplinary action. “Wells Fargo failed to meet this standard,” she said, adding: “We are pleased that customers will receive restitution for surrender fees and sales charges incurred as a result of these recommendations.”
Additionally, in August 2016, the firms took several steps to improve their supervision of switches involving variable annuities, including developing a switch alert to identify when the proceeds from a variable annuity liquidation are used to buy an investment company product, FINRA pointed out Wednesday.
Wells Fargo violated NASD Rule 3010 (for conduct before Dec. 1, 2014), FINRA Rule 3110 (for conduct on or after Dec. 1, 2014), and FINRA Rule 2010, FINRA claimed.
Wells Fargo also signed a FINRA AWC letter Thursday in which it agreed to pay a fine of $350,000 and restitution of $201,498 plus interest to clients for failing to reasonably supervise the activities of ex-reps Charles Frieda and Charles Lynch who, between November 2012 and October 2015, recommended that many of their clients invest a substantial portion of their assets at Wells Fargo in four high-risk energy securities. FINRA approved the letter Friday.
“The representatives’ conduct generated multiple red flags regarding overconcentration in their customers’ account that raised suitability concerns that Wells Fargo failed to reasonably investigate,” according to FINRA.
As a result, the firm violated NASD Rule 3010(a) and FINRA Rules 3110(a) and 2010, FINRA said.
“Wells Fargo Advisors is committed to helping our clients achieve their investment goals, and we take our supervisory responsibilities seriously,” Leordeanu told ThinkAdvisor on Wednesday. “The financial advisors involved in this matter are no longer with the firm and we are pleased to have this matter behind us as the conduct at issue occurred between 2012 and 2015.”