Wells Fargo Advisors was hit with a $4 million penalty, plus reimbursements, by the Securities and Exchange Commission (SEC) for misconduct in the sale of financial products known as market-linked investments to retail investors.
An SEC investigation found that Wells Fargo generated large fees by encouraging retail customers to actively trade the investments, which were intended to be held to maturity. The strategy, which involved selling the MLIs before maturity and investing the proceeds in new MLIs, generated substantial fees for Wells Fargo, said the SEC. At the same time, it reduced the customers’ investment returns.
The SEC also discovered that Wells Fargo representatives did not understand the impropriety or costs of these recommendations to customers. Further, Wells Fargo supervisors routinely approved these transactions despite internal policies prohibiting short-term trading of the products.
“It is important that brokers do their homework before they recommend that their retail customers buy or sell complex structured products,” Daniel Michael, chief of the Enforcement Division’s Complex Financial Instruments Unit, said. “The products sold by Wells Fargo came with high fees and commissions, which Wells Fargo should have taken into account before advising retail customers to sell their investments and reinvest the proceeds in similar products.”
In the settlement, Wells Fargo agreed to pay the $4 million penalty. On top of that, they had to return $930,377 of ill-gotten gains plus $178,064 of interest. Wells Fargo also agreed to a censure and to not do this again and take remedial steps to address the allegedly improper sales practices.
The investigation was supervised by Jeffrey Shank and conducted by Emily Rothblatt, Michael Wells, and Ana Petrovic.