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.”