Wells Fargo Brokerage Firms Ordered to Pay $3.4M Over Unsuitable Exchange-Traded Product Recommendations

The Financial Industry Regulatory Authority said that Wells Fargo Advisors Financial Network and Wells Fargo Clearing Services LLC must pay over $3.4M in restitution to customers who were impacted by unsuitable recommendations involving exchange-traded products and the supervisory failures involved. By settling, Wells Fargo (WFC) is not denying or admitting to the regulator’s charges.

According to FINRA, between 7/1/200 and 5/1/2012, there were registered representatives at Wells Fargo (WFC) who recommended these volatility-linked ETPs without fully comprehending the investments’ features and risks. The self-regulatory organization also found that the broker-dealer did not put into place a supervisory system that was reasonable enough to properly supervise the ETP sales during the period at issue.

The regulator said that the brokers did not have reasonable grounds for recommending these ETPs to customers whose risk profiles and investment goals were considered moderate or conservative. The representatives are accused of making inappropriate recommendations about when to leave these positions in a “timely manner.”

Wells Fargo purportedly did not provide registered representatives with “reasonable training” regarding the risks and features involving volatility ETPs.

After FINRA detected the supervisory deficiencies, which was also when Wells Fargo was ordered to pay a $2.1M fine and more than $641K for similar violations involving inverse and leveraged exchange-traded product sales, the firm reportedly took remedial action to remedy the deficiencies. Wells Fargo also cooperated with FINRA’s probe by hiring a consulting firm to figure out what would be appropriate restitution to pay customers that were impacted.

Volatility-Linked ETPs
These complex products are at risk of being improperly sold by brokers, who may mistakenly think that these particular ETPs can be utilized as a long-term hedge on equity positions in the event of a market turn. In reality, said FINRA, these ETPs are usually short-term trading products that “degrade significantly” and shouldn’t be part of any “long-term buy-and-hold investment strategy.”

In Regulatory Notice 17-32, FINRA reminded firms of their obligations when it comes to the sale of volatility-linked ETPs. The SRO noted that these exchange-traded products are “designed to track Chicago Board Options Exchange Volatility Index futures,” with many of them very likely to decline in value as time passes. They are not for all retail investors, especially those who are involved in any “traditional buy-and-hold investment.

FINRA explained that volatility-linked ETPs usually offer exposure to short- and mid-term VIX futures indices. They don’t bet on the actual VIX.

Many of these ETPs that have sought to keep “targeted maturity exposure” to these futures have lost a lot of value, in certain instances over 90% of their worth since inception. The SRO went on to say that when firms offer volatility-linked ETPs to investors, they must make sure that they are suitable for the customer in that it fits the investor’s criteria for the degree of risk that can be handled, any investment goals, and liquidity needs.

Due diligence must be conducted to determine suitability. Firms must adequately supervise the registered representatives soliciting these ETPs.

ETP Fraud Cases
Our exchange traded product law firm is here to help investors try to recoup their securities fraud losses. Contact Shepherd Smith Edwards and Kantas, LTD LLP to speak to one of our exchange-traded fund fraud lawyer or exchange-traded note fraud attorneys today.

Read the FINRA Letter of Acceptance, Waiver, and Consent (PDF)

FINRA Regulatory Notice 17-32

More Blog Posts:
FINRA Fines Wells Fargo $3.25M Over OTC Options Trading Reporting, Stockbroker Fraud Blog, June 22, 2017

Wells Fargo Advisors Must Pay $357K Securities Arbitration Award Over Unsuitable Investments, Stockbroker Fraud Blog, March 13, 2017