Wells Fargo Clearing Services and Wells Fargo Advisors Financial Network have been charged of not following adequate compliance policies and procedures about the suitability of their recommendations
Exterior of a Wells Fargo branch. (Credit: Wells Fargo)
The US Securities and Exchange Commission (SEC) has ordered subsidiaries of Wells Fargo to pay a penalty of $35m to settle charges levied on their investment recommendation practices.
The subsidiaries Wells Fargo Clearing Services and Wells Fargo Advisors Financial Network have been accused by the SEC for not supervising registered representatives and investment advisers who recommended retail investors to make single-inverse ETF investments. The charges relate to their practices between April 2012 and September 2019.
Additionally, the Wells Fargo’s subsidiaries were charged of not following adequate compliance policies and procedures regarding the suitability of their recommendations.
The SEC said that Wells Fargo’s policies and procedures during the period were not designed reasonably to stop and detect inappropriate recommendations of single-inverse ETFs.
The agency said that the proceeds from the penalty will be distributed to impacted investors.
According to the SEC, single-inverse ETFs when held for more than a day, especially in volatile markets, could lead to large and unexpected losses to investors.
Wells Fargo did not adequately train its staff about single-inverse ETFs, claimed SEC
The SEC has also accused Wells Fargo of failing to supervise the recommendations made by its employees about single-inverse ETFs, and did not train them enough about the products.
The agency’s order found that certain Wells Fargo’s brokers and advisers did not have a complete understanding of the risk of losses posed by the complex products, when held long term. Owing to this, some of the Wells Fargo’s investment advisers and registered representatives made improper recommendations that led certain clients to buy and hold single-inverse ETFs for months or years, said the SEC.
As per the order, there were a number of retirees and senior citizens among the impacted clients who were with limited incomes and net worth, and conservative or moderate risk tolerances.
SEC enforcement division associate director Antonia Chion said: “Firms must maintain effective compliance and supervisory programs to ensure that the securities they recommend are suitable for their clients.
“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.”
Recently, the US Department of Justice (DOJ) said that Wells Fargo and its subsidiary Wells Fargo Bank agreed to pay a penalty of $3bn to settle certain irregularities between 2002 and 2016.