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Regulation and Compliance > Federal Regulation > FINRA

Wells Fargo Clearing to Pay $3M Over Reps' Unsuitable Trades

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What You Need to Know

  • Wells Fargo Clearing failed to supervise a former registered rep as well as 40 other reps' unsuitable short-term trading.
  • The trading involved syndicate preferred stock, closed-end funds and medium-term notes.
  • Trading in these securities, which are typically held for long periods, is subject to potential abuse by reps, FINRA says.

The Financial Industry Regulatory Authority has ordered Wells Fargo Clearing Services to pay more than $3 million for failing to supervise a former registered rep as well as 40 other reps’ unsuitable short-term trading of syndicate preferred stock, closed-end funds (CEFs) and medium-term notes (MTNs).

According to FINRA’s order, from January 2017 to December 2018, WFCS failed to reasonably follow up on identified red flags of the former representative’s short-term trading of these products.

During the same period, WFCS failed to establish and maintain a reasonable supervisory system to assess whether its reps recommended to retail customers short-term trades of syndicate preferred stocks and CEFs that were unsuitable, the order states.

“At least 40 of the firm’s other representatives recommended that WFCS’ retail customers purchase syndicate preferred stocks and CEFs and then sell the positions within 180 days, causing the customers to sustain losses on these transactions while the representatives collected concessions and commissions,” according to FINRA’s order.

During the relevant period, WFCS permitted representatives to recommend that customers purchase syndicate preferred stocks, CEFs and MTNs.

Income-Generating Securities

“These products are income-generating securities,” FINRA states.

“They typically offer more consistent income payments than common stock, and in the case of preferred stocks and CEFs, higher payments than many bonds,” according to the order. “Preferred stock, CEFs, and MTNs are generally purchased for their income features and held long-term. For each of the products at issue here, WFCS was a member of the selling syndicate.”

Thus, when WFCS’ customers purchased these products, “the issuer paid WFCS a sales concession (typically 2% for preferred stock, and between 1% and 2% for CEFs and MTNs), a portion of which WFCS shared with the representatives,” FINRA said.

In addition, where customers later sold these securities, “WFCS typically, but not always, charged customers sales commissions, which WFCS also shared with the representatives,” FINRA said.

Trading in syndicate preferred stock, CEFs and MTNs “is subject to potential abuse where representatives make recommendations to customers to purchase the security, collect the sales concession, and then recommend a short-term sale of the security,” FINRA’s order states.

This practice “is particularly concerning if the representative then solicits the customer to purchase a different preferred stock, CEF, or MTN, again receiving a front-end sales concession,” according to the order.

Multiple WFCS representatives engaged in repeated short-term buying and selling of these syndicate products.

Also, WFCS’ procedures stated that syndicate preferred stock and CEFs “were generally supposed to be held long-term, and required that the firm review trends of short-term syndicate trading,” the order states. “However, the procedures did not explain what constituted short-term trading or explicitly set forth the duration of an appropriate holding period.”

Further, WFCS relied on an electronic system to identify short-term trading in syndicate preferred stock, CEFs and MTNs.

“This system generated daily Syndicate Short-Term Hold alerts when there was a liquidation within 90 days of purchase of these types of securities,” according to the order. “The system did not generate alerts for liquidations of these securities that occurred more than 90 days after purchase and the firm had no other automated system that identified such liquidations.”

Wells Fargo Clearing was censured, ordered to pay a $400,000 fine, restitution of $599,025 plus interest and disgorgement of $2.031 million plus interest.

“We take our supervisory responsibilities seriously, and we have enhanced our supervisory system to better serve our clients,” Wells Fargo said Friday in a statement. “We’re pleased to resolve this matter.”


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