Two Wells Fargo subsidiaries have agreed to pay more than $2 million dollars to settle charges they failed to supervise advisors who switched investors from variable annuity products to other investments without cost justification, the Financial Regulatory Authority (Finra) announced today.
Wells Fargo Clearing Services LLC and Wells Fargo Advisors Financial Network LLC have agreed to pay more than $1.4 million in restitution and interest to about 100 customers who paid costly surrender fees and other charges when their variable annuities were switched. The firm also agreed to pay fines totaling $675,000 for failing to supervise recommendations that customers switch from variable annuities to investment company products.
Finra found that between January 2011 and August 2016, Wells Fargo failed to supervise the suitability of its reps’ recommendations directing customers to sell variable annuities and use the proceeds to purchase one or more investment company products, such as mutual funds or unit investment trusts, the regulator said in a statement.
In settling the charges, Wells Fargo neither admitted nor denied Finra’s findings. “At Wells Fargo Advisors we take our supervisory responsibilities seriously. Affected clients will receive restitution, plus interest,” said Wells Fargo spokeswoman Shea Leordeanu. “We enhanced our platforms in August 2016 to include additional oversight measures confirming investment suitability. We are pleased to have this matter behind us as the conduct at issue occurred between January 2011 and August 2016."
Collectively, the potentially unsuitable switches caused customers to pay $1,445,167.50 in unnecessary surrender fees and upfront sales charges associated with the purchase of the investment company products, Finra said.
“In spite of directives in the firms’ supervisory procedures that supervisors review the suitability of any product switch by considering the comparative costs and benefits associated with the new and existing products, the firms did not obtain from variable annuity issuers data sufficient to review the suitability of variable annuity surrenders and subsequent switches, including surrender fees,” Finra said.
As a result, Wells Fargo’s representatives recommended at least 101 potentially unsuitable switches that required customers to incur both surrender fees and substantial new sales charges.
For example, one former representative recommended that a customer liquidate a variable annuity with a surrender value of $126,681, which caused the customer to pay a surrender fee of $5,070, and then use the proceeds to purchase class A mutual funds with upfront sales charges totaling $5,531. In addition to causing the customer to incur $10,601 in surrender fees and upfront sales charges, the recommended switch resulted in the customer earning less annual income than she would have earned had she not sold the variable annuity, Finra said.
Jessica Hopper, executive vice president and head of Finra’s Department of Enforcement, said, “Firms must have a reasonable supervisory system in place to detect potentially unsuitable switches. Wells Fargo failed to meet this standard. We are pleased that customers will receive restitution for surrender fees and sales charges incurred as a result of these recommendations.”
Wells Fargo also failed to send switch letters to clients, which could have confirmed customers’ understanding of the transaction and its related risks and expenses, despite company procedures that required the firms to do so, Finra said.
Wells Fargo’s procedures required that such letters be sent “automatically” based on alerts generated by the firms’ supervisory systems, unless a qualified supervisor withheld such a letter. “The firms did not, in fact, have a switch alert to identify switches from variable annuities to investment company products during the relevant period and the firms did not send switch letters to affected customers,” Finra added.