The Securities and Exchange Commission today announced that Wells Fargo Advisors LLC agreed to settle charges of misconduct in the sale of financial products known as market-linked investments, or MLIs, to retail investors.

The SEC found that Wells Fargo generated large fees and commissions (5 percent to 12 percent) by improperly encouraging retail customers to actively trade the products, which were intended to be held to maturity. Without admitting or denying the SEC’s findings Wells Fargo agreed to pay to pay a $4 million penalty and return $930,377 in ill-gotten gains plus $178,064 of interest to customers.

The trading strategy – which involved selling the MLIs before maturity and investing the proceeds in new MLIs – generated substantial fees for Wells Fargo, which reduced the customers’ investment returns, the SEC order states. The improper conflicted recommendations were made by registered representatives between January 2009 and June 2012, the SEC said.

The order further found that the Wells Fargo reps involved did not reasonably investigate or understand the significant costs of the recommendations. The SEC found that Wells Fargo supervisors routinely approved these transactions despite internal policies prohibiting short-term trading or “flipping” of the products.

“It is important that brokers do their homework before they recommend that their retail customers buy or sell complex structured products,” said Daniel Michael, Chief of the Enforcement Division’s Complex Financial Instruments Unit. “The products sold by Wells Fargo came with high fees and commissions, which Wells Fargo should have taken into account before advising retail customers to sell their investments and reinvest the proceeds in similar products.”

Wells Fargo Advisors (WFA) customers typically incurred costs equal to approximately 5 percent to 6 percent of their principal amount when they purchased MLIs in the offering, which included selling commissions of up to 3 percent, plus 2 percent to 3 percent of structuring and hedging costs received by WFA affiliates. The costs were imbedded in the price of the MLI rather than separately charged to the customer. As a result, a customer who purchased an MLI at a $100 par value would receive an MLI with a value between $94 and $95 as of the day of purchase.

There were also additional costs associated with redeeming MLIs early. Prior to September 2011, WFA representatives, with their supervisor’s approval, could charge an additional sales commission (3%) on early redemptions. Second, the price at which WFA or its affiliates were willing to buy back the MLIs in the affiliated secondary market

it provided for its customers was typically lower than the current valuation of the MLI (the “markdown”). On average, MLI repurchases were marked down between 2% and 3%.

Wells Fargo also agreed to a censure and to cease and desist from committing or causing any violations and any future violations of certain antifraud provisions of the federal securities laws. The order recognizes that Wells Fargo, which did not immediately respond to a request for comment, took remedial steps to address the allegedly improper sales practices.