FINRA orders the firm to pay $3.4 million in restitution over allegedly “unsuitable recommendations” regarding volatility-linked exchange-traded products (ETPs).
Wells Fargo Clearing Services and Wells Fargo Advisors Financial Network have been ordered to pay $3.4 million in restitution to clients that were allegedly misled via “unsuitable recommendations of volatility-linked exchange-traded products (ETPs),” according to the Financial Industry Regulatory Authority (FINRA), a self-regulatory organization (SRO) for broker-dealers.
On a Wells Fargo website, the volatility-linked ETPs are described as “another type of nontraditional ETPs … with exposure to futures contracts tied to the CBOE SPX Volatility Index (better known as the VIX). These products use various complex methodologies to gain exposure to the VIX, and are not designed to be long-term investments.”
The FINRA charges of poor advice and related supervisory failures were alleged to have occurred between July 1, 2010, and May 1, 2012, FINRA officials say, via “certain Wells Fargo registered representatives” who urged clients to invest in “volatility-linked ETPs without fully understanding their risks and features.”
The complicated, volatility-linked ETPs “could be misunderstood and improperly sold by registered representatives,” according to FINRA. “Certain Wells Fargo representatives mistakenly believed that the products could be used as a long-term hedge on their customers’ equity positions in the event of a market downturn.”
However, volatility-linked ETPs are “generally short-term trading products that degrade significantly over time and should not be used as part of a long-term buy-and-hold investment strategy,” FINRA officials say.
“In light of the unique features and risks of volatility-linked ETPs, FINRA issued Regulatory Notice 17-32 [on Oct. 16] to remind firms of their sales practice obligations relating to these products,” according to FINRA. “FINRA encourages member firms to review the guidance about volatility-linked ETPs provided in today’s Regulatory Notice, as well as FINRA’s earlier guidance about heightened supervision of complex products set forth in Regulatory Notice 12-03, and assess the reasonableness of their own practices and supervision of these products.”
The broker-dealer extensions of Wells Fargo “failed to implement a reasonable system to supervise solicited sales of these products during the relevant time period. However, FINRA found that Wells Fargo took remedial action to correct its supervisory deficiencies in May 2012, prior to detection by FINRA and around the time that the firm was fined for similar violations relating to sales of leveraged and inverse ETPs,” FINRA officials say.
“In addition, Wells Fargo provided substantial assistance to FINRA’s investigation by, among other things, engaging a consulting firm to determine the appropriate restitution to be provided to affected customers. FINRA took Wells Fargo’s previous corrective actions and cooperation into account when assessing the sanctions in this matter, and encourages member firms to assess their own sales and supervision of volatility ETPs.”
FINRA urges restitution in misconduct cases, says Susan Schroeder, executive vice president of FINRA’s Department of Enforcement, in a prepared statement.
“We also credit firms that proactively detect and correct issues prior to detection by FINRA, as Wells Fargo did in this matter,” Schroeder says. “Firms soliciting sales of volatility ETPs should already be well aware of the unique risks that they pose – but FINRA’s Regulatory Notice 17-32 is intended to further educate the industry so that member firms can assess their own practices and take appropriate remedial action if necessary.”
Wells Fargo has settled with FINRA over the charges, officials say. The firm has “neither admitted nor denied the charges, but consented to the entry of FINRA’s findings,” FINRA officials add.
“Wells Fargo has settled claims with FINRA related to the sale and supervision of certain volatility-linked exchange-traded products purchased in conservative investment accounts between July 2010 and May 2012,” according to a Wells Fargo statement sent to FTF News via a bank spokesperson. “We are committed to helping our clients achieve their investment goals through advice that is regularly reviewed and aligned to their objectives and risk tolerances. In cooperating fully with FINRA, we have made significant policy and supervision changes, including the discontinuation of the ETPs in focus.”
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