Wells Fargo Investments LLC has agreed to pay $3.1 million to settle charges it allowed unsuitable sales of reverse convertible securities and for failing to provide sales charge discounts on unit investment trusts (UITs).
The San Francisco-based financial services firm's penalty included $1.1. million in customer restitution to settle the charges brought by the Financial Industry Regulatory Authority (Finra) without admitting or denying the allegations.
The settlement is one of six that Finra reached with broker-dealers as part of a five-year exam sweep into UIT practices, which has resulted in nearly $17 million in restitution being paid to 10,000 harmed customers.
Repeated UIT rollovers could generate commissions of as much as 12.8% over a two-years, in addition to sales charges of 3.95%, Finra said. The trusts are usually designed to be held 15 to 24 months, according to the settlement.
Wells Fargo settled the charges without admitting or denying the findings. "As part of an industry-wide review of UIT early rollovers, Wells Fargo Advisors has enhanced training and education for financial advisors and supervisors and enhanced its electronic system for monitoring early UIT liquidations. We are pleased to have this matter resolved and will be making payments to impacted clients, with interest,' Wells Fargo Spokeswoman Shea Leordeanu said.
In the most recent case, Finra said that from July 2013 to June 2018. Wells Fargo did not have an automated system to detect when UITs were rolled over well ahead of their maturity dates, Finra said. Over that period, Wells executed around $27 billion in UIT transactions for 123,000 customer accounts, including around $1.8 worth of trades in which UITs were sold before their maturity dates and in some cases used to purchase another UIT with a similar investment objective.
Finra initiated the sweep of early UIT rollovers after Morgan Stanley failed to reasonably supervise early UIT rollovers in thousands of customers’ accounts. The firm agreed to pay $9.8 million in restitution and a $3.25 million fine in 2017.
“This multi-year effort reflects FINRA’s commitment to proactively identifying problems and providing restitution to harmed investors,” Jessica Hopper, Finra’s head of enforcement, said in a statement. “Firms should be particularly vigilant in identifying representatives who recommend trading strategies intended to generate commissions for the representative without regard for the intended use of the product.”
In June 2021, Merrill Lynch, Pierce, Fenner & Smith agreed to pay $8.4 million in restitution to customers to settle charges they were charged excessive sales fees on $32 billion in UIT sales. The firm was also charged with failing to supervise reps who sold $2.5 billion in client UITs before their maturity dates, triggering additional fees.
These cases should also serve as a clear reminder to member firms to ensure their systems “are reasonably designed to supervise sales of all the products they offer, Hooper said.