Wells Fargo to Pay $35 Million to Investors for Inverse ETF Violations
Wells Fargo has agreed to pay $35 million to settle Securities and Exchange Commission charges that brokers at Wells Fargo Advisors and its independent Financial Network (FiNet) channel were allowed to unsuitably sell single-inverse exchange traded funds.
Wells Fargo Clearing and FiNet failed to have policies and procedures in place to monitor recommendations that customers buy and hold single-inverse ETFs, which can cause “large and unexpected losses” when held for more than one day, the SEC said in announcing the settled charges on Thursday.
Wells Fargo, which neither admitted nor denied the findings, no longer sells single-inverse ETFs in its full-service channels, said Wells spokeswoman Shea Leordeanu. It has not terminated individual advisors or brokers over the alleged unsuitable sales, she said.
The sanction was announced the same day Wells estimated in its 2019 annual report that it could spend as much as $2.6 billion beyond what it has already reserved to settle future legal and regulatory actions.
Wells last week agreed to a $3 billion settlement with the SEC and Department of Justice over its fake account scam disclosed more than years ago, and has agreed to numerous regulatory and central bank consent orders. Last year it agreed to pay $1 billion in penalties over auto insurance and mortgage interest features sold through the bank.
Thursday’s announcement focuses on the broker-dealer operation, and follows warnings from the SEC and Finra to firms industry-wide about complicated products like inverse ETFs that pay off if underlying indexes underperform.
From April 2012 to September 2019, brokers and investment advisers at Wells sold the inverse ETFs in more than 40,000 advisory accounts and 2,000 brokerage accounts, according to the SEC. Customers included senior citizens and retirees who had limited incomes and net worth, and to investors who said they had conservative or moderate risk tolerances, the regulator said.
Wells did not have procedures designed to prevent and detect the unsuitable recommendations and did not adequately train advisors concerning the products despite internal guidance warning that single-inverse ETFs with daily resets could create large and unexpected losses if held for longer than a day, particularly in volatile markets
Wells paid $2.7 million in fines and restitution to the Financial Industry Regulatory Authority in 2012 for failing to supervise sales of non-traditional ETFs, and agreed to fix its policies and procedures, but “significant shortcomings remained,” the SEC order said.
Wells was further put “on notice” when an internal branch examiner in the fall of 2017 raised concerns about an advisor who recommended that some clients hold single-inverse ETFs for up to five years, the SEC said.
The $35 million penalty will be distributed to harmed investors, according to the SEC.
“Firms must maintain effective compliance and supervisory programs to ensure that the securities they recommend are suitable for their clients,” Antonia Chion, associate director of the SEC’s Enforcement Division, said in a statement.