Wells Fargo will pay over $3 million to settle Financial Industry Regulatory Authority charges that it missed instances of registered reps recommending short-term selling on securities designed for long-term holds.
According to the settlement, Wells Fargo reps recommended syndicated preferred stock, closed-end funds and medium-term notes, all income-generating securities that were “generally purchased for their income features and held long-term.”
When customers purchased these securities, the issuer paid a sales concession, a portion of which was shared with reps. Often, customers were charged sales commissions; Wells Fargo also partially shared those with reps, according to FINRA.
However, “multiple” reps “engaged in repeated short-term buying and selling” of these products between January 2017 and December 2018. During this time, reps required a “reasonable basis” to believe a securities transaction was suitable for a customer (though this was later usurped by rules adhering to the Regulation Best Interest standard).
Wells Fargo had written policies indicating these “syndicate products” should typically be held long-term and relied on an electronic system to flag short-term trading of these products. The system generated daily alerts when there was a liquidation within 90 days of purchasing one of these securities.
However, Wells Fargo allegedly missed one rep who recommended 118 purchases of syndicated preferred stock and closed-end funds to customers and suggested that those customers sell their positions at a loss after holding them for 180 days or less.
“On multiple occasions, the representative recommended the purchase of another syndicate preferred stock or CEF soon after the sale of the first preferred stock or CEF, earning another sales concession,” the settlement read.
According to FINRA, of the 118 short-term sales the rep made of preferred stock and closed-end funds, 111 were held between 91 and 180 days, which meant there was no alert. The system was only set up to catch securities liquidations up to 90 days after the initial purchase.
Though the firm did catch on and notified the rep about the “questionable nature” of some of his trades, the rep continued to make short-term recommendations on these products for months, according to FINRA. By December 2018, he’d solicited 131 purchases of the three products in question with a loss on the sale, though the firm earned about $578,023 in sales from the issuer and $282,564 in sales commissions from customers, according to FINRA.
That rep wasn’t the only one making short-term recommendations; during the time in question, at least 40 reps recommended 1,504 syndicated preferred stocks and CEF purchases held less than 180 days with a loss on the sale; 1,253 of those were held between 91 and 180 days. Wells Fargo earned about $1.45 million in sales commissions from issuers and about $316,460 in commissions from customers.
“We take our supervisory responsibilities seriously, and we have enhanced our supervisory system to better serve our clients,” a Wells Fargo spokesperson said about the settlement. “We’re pleased to resolve this matter.”
Without admitting nor denying the findings, Wells Fargo agreed to a censure, a $400,000 fine, restitution totaling $599,025.29, and disgorgement of about $2 million, including interest.