Wells Fargo Clearing Services, the brokerage arm of its namesake bank, has agreed to pay about $3 million to settle Finra charges that it failed to supervise representatives who recommended unsuitable securities to retail customers, according to the regulator.

Wells Fargo customers sustained losses while the brokerage subidiary and its reps earned about $1.8 million in concessions and commissions on 1,504 transactions, according to Finra's order.

Wells Fargo agreed to a censure, a $400,000 fine, restitution of about $600.000 plus interest, and disgorgement of $2 million plus interest, according to Finra.

The self-regulatory organization noted that it's far from the first time the bank has been penalized in such fashion. Since February 2020, Wells Fargo has paid nearly $43 million in fines, restitution and penalties for failing to supervise reps in four different incidents, according to Finra.

Wells Fargo Clearing Services is headquartered St. Louis and has 19,000 registered brokers working across about 5,000 branches.

A spokesperson for the firm said, "We take our supervisory responsibilities seriously, and we have enhanced our supervisory system to better serve our clients. We're pleased to resolve this matter."

In this latest incident, between January 2017 and December 2018 the firm failed to establish and maintain a reasonable supervisory system to ascertain whether its representatives were recommending short-term trading of products it had classified as long-term holds, according to Finra.

Wells Fargo permits its representatives to purchase syndicate preferred stock, closed-end funds and medium-term notes, categorizing them as income-generating securities that are held long-term, Finra said.

For each of the products, Wells Fargo was part of the selling syndicate, so when customers bought them, the issuer paid the firm a concession of typically 2% for the preferred stock and between 1% and 2% for the closed-end funds and medium-term notes, Finra said. When customers sold the products, Wells Fargo usually charged the customer a sales commission, with both the concession and the commission shared with the representatives, the letter said.

“Trading in syndicate preferred stock, CEFs, and MTNs is subject to potential abuse where representatives make recommendations to customers to purchase the security, collect the sales concession, and then recommend a short-term sale of the security,” Finra stated in its order. “This practice is particularly concerning if the representative then solicits the customer to purchase a different preferred stock, CEF, or MTN, again receiving a front-end sales concession.”

A total of 40 representatives recommended that their customers buy and sell their positions within 180 days, resulting in customer losses, Finra said.

During the relevant period, according to Finra, one rep recommended 118 purchases of syndicate preferred stock and closed-end funds to retail customers, earning the concession, only to recommend they then sell the same products for a loss, usually within 180 days of the purchase, earning the commission. Then the rep recommended a new purchase of another syndicate preferred stock or closed-end fund, earning another concession, Finra said, adding that there were 13 instances of recommendations to purchase and sell medium-term notes.

The regulator noted that the rep was later barred for refusing to participate in Finra's inquiry.