The Financial Industry Regulatory Authority (Finra) today fined Wells Fargo Investments $2 million for unsuitable sales of reverse convertible securities to 21 customers, most whom were over 80 years old.

Finra also charged Wells Fargo for failing to provide sales charge discounts on Unit Investment Trust (UIT) transactions to any eligible customers.

As part of the settlement, Wells Fargo must pay restitution to customers who did not receive UIT sales charge discounts and pay restitution to certain customers found to have unsuitable reverse convertible transactions.

Wells Fargo neither admitted nor denied the charges, but consented to the entry of Finra's findings.

"Wells Fargo failed to review reverse convertible transactions to ensure they were suitable and also did not provide sales charge discounts to eligible customers purchasing unit investment trusts, both serious failings that harmed investors,'' said Brad Bennett, executive vice president and chief of enforcement for Finra.

Finra also filed a complaint against former Wells Fargo registered representative Alfred Chi Chen, who allegedly recommended and sold the unsuitable reverse convertibles, and made unauthorized trades in several customer accounts, including accounts of deceased customers.

Reverse convertibles are interest-bearing notes in which repayment of principal is tied to the performance of an underlying asset, such as a stock or basket of stocks. Depending on the specific terms of the reverse convertible, an investor risks sustaining a loss if the value of the underlying asset falls below a certain level at maturity or during the term of the reverse convertible.

Finra claimed Chen had recommended hundreds of unsuitable reverse convertible investments to 21 clients, most of whom were elderly and/or had limited investment experience and low risk tolerance.

As of June 2008, Chen had 172 accounts that held reverse convertibles, with 148 of those accounts having concentrations greater than 50 percent of their total account holdings, and 46 having concentrations greater than 90 percent. Fifteen of the 21 customers were over 80 years old. The reverse convertible transactions exposed these customers to risk inconsistent with their investment profiles, and resulted in overly concentrated reverse convertible positions in their accounts, Finra said.

-Jim McConville