SEC Hits Wells Fargo for Unsuitable Advice for Retail Clients Over Extended Period
The US Securities and Exchange Commission announced settled charges at the end of Febuary against Wells Fargo Clearing Services and Wells Fargo Advisors Financial Network for failing reasonably to supervise investment advisers and registered representatives who recommended single-inverse ETF investments to retail investors, and for lacking adequate compliance policies and procedures with respect to the suitability of those recommendations. The SEC ordered Wells Fargo to pay a $35m penalty, which will be distributed to harmed investors.
As noted in the SEC’s order and reflected in Wells Fargo’s internal guidance, when single-inverse ETFs are held for longer than a day, particularly in volatile markets, investors may experience large and unexpected losses. The SEC’s order finds that from April 2012 through September 2019, Wells Fargo’s policies and procedures were not reasonably designed to prevent and detect unsuitable recommendations of single-inverse ETFs. Further, Wells Fargo failed adequately to supervise its employees’ recommendations regarding single-inverse ETFs, and did not adequately train them concerning those products. The order finds that some Wells Fargo brokers and advisers did not fully understand the risk of losses these complex products posed when held long term. As a result, certain Wells Fargo investment advisers and registered representatives made unsuitable recommendations to certain clients to buy and hold single-inverse ETFs for months or years. According to the order, a number of these clients were senior citizens and retirees who had limited incomes and net worth, and conservative or moderate risk tolerances.
“Firms must maintain effective compliance and supervisory programs to ensure that the securities they recommend are suitable for their clients,” said Antonia Chion, Associate Director of the SEC Enforcement Division. “As a result of Wells Fargo’s failure to meet these important obligations, some of its employees recommended complex instruments to retail investors who did not understand the risks involved.”
The order finds that Wells Fargo failed to adopt written compliance policies and procedures reasonably designed to prevent unsuitable recommendations of single-inverse ETFs, and failed adequately to implement its existing written policies and procedures. The order also found that Wells Fargo failed reasonably to supervise its financial professionals with a view to preventing their unsuitable recommendations. Without admitting or denying the findings, Wells Fargo agreed to pay a $35m penalty and distribute the funds to certain clients who were recommended to buy single-inverse ETFs and suffered losses after holding the positions for longer periods. The order also censures Wells Fargo and requires Wells Fargo to cease and desist from committing or causing any future violations of the relevant provisions.