Wells Fargo settles with regulator over securities
Bank to repay patrons who lost money on a complex investment.
An investment industry regulator has ordered Wells Fargo to pay $3.4 million to brokerage customers who lost money buying complicated securities that even Wells Fargo brokers didn’t fully understand.
The Financial Industry Regulatory Authority, or Finra, said Monday that some Wells Fargo representatives mistakenly thought a kind of complex security linked to the popular Vix market-volatility index could be used to protect long-term investors in case of a stock market tumble.
In fact, the securities in question were appropriate only for short-term investors and were likely to lose significant value over time, Finra said.
The regulatory body said Wells Fargo brokers were selling these securities, called volatility-linked exchange-traded products, “without fully understanding their risks and features.” Wells Fargo also did not have a “reasonable system” to supervise how and when those securities were sold and did not properly train brokers.
The improper sales took place from July 2010 to May 2012 and were identified and reported by Wells Fargo, which corrected the problem, Finra said.
The finding was unrelated to the bank’s ongoing review of its consumer sales practices prompted by last year’s sham-accounts scandal. Rather, the bank in 2012 was fined by Finra for improper sales of a different type of complex investment product, which caused the bank to alter its investment guidelines for the Vix-linked products.
The bank agreed to pay $3.4 million in restitution as part of a settlement with Finra, but was not fined.
Wells Fargo did not admit to wrongdoing, but Finra noted the bank’s actions were a factor in the outcome of the case.
“Finra seeks restitution when customers have been harmed by a member firm’s misconduct,” Finra Executive Vice President Susan Schroeder said in a statement. “We also credit firms that proactively detect and correct issues prior to detection by Finra, as Wells Fargo did in this matter.”
The restitution payments will go to the holders of about 1,300 brokerage accounts. The payouts range from less than $1 to $80,000, with many totaling several hundred or a few thousand dollars, according to Finra documents.
Wells Fargo was selling the securities to conservative, long-term investors who did not have the proper risk profile until May 2012, Finra said. After that, the bank made the securities available only to investors willing to take more risk. The bank said it has since stopped selling the volatility-linked products altogether.
Phil Aidikoff, a securities lawyer in Los Angeles who represents investors and brokers, said cases like this involving nontraditional investment products are common.
Brokers at big firms, Aidikoff said, typically don’t analyze investment products themselves and instead rely on their firms to perform due diligence. If the parent company says a product isn’t too risky for ordinary investors, brokers will offer it, even if they don’t understand it.
“You have some brokers who have been in the business a long time, and you have some guys who were selling stereo equipment six months ago,” Aidikoff said. “If brokers understood what the investment was, they shouldn’t have sold it. But they didn’t understand. They simply relied on what they were told by the company.”