Wells Fargo will pay more than $3 million to settle allegations by the Financial Industry Regulatory Authority that it lost cases of registered representatives recommending short-term sales of securities designed to be held long-term.
According to RESIDENCEWells Fargo representatives recommended preferred common stocks, closed-end funds and intermediate-term notes, all income-generating securities that “were generally purchased for their income characteristics and held for the long term.”
When customers purchased these securities, the issuer paid a sales concession, a portion of which was shared with the representatives. Often, clients were charged sales commissions; Wells Fargo also partially shared those with proxies, according to FINRA.
However, “many” representatives “engaged in repeated short-term purchases and sales” of these products between January 2017 and December 2018. During this time, the representatives required a “reasonable basis” to believe that a securities transaction was suitable for a client (although this was later usurped by rules adhering to the standard best interest regulation).
Wells Fargo had written policies indicating that these “syndicate products” should typically be held long-term and rely on an electronic system to mark short-term trades in these products. The system generated daily alerts when there was a liquidation within 90 days of the purchase of one of these securities.
However, Wells Fargo allegedly lost a representative who recommended 118 purchases of preferred mutual stocks and closed-end funds to clients and suggested that those clients sell their positions at a loss after holding them for 180 days or less .
“In many cases, the representative recommended the purchase of another syndicate preferred share or CEF immediately after the sale of the first preferred share or CEF, thereby gaining another selling concession,” the agreement said.
According to FINRA, of the 118 short sales the representative made to preferred stocks and closed-end funds, 111 were held between 91 and 180 days, meaning there was no alert. The system was designed only to capture liquidations of securities up to 90 days after the initial purchase.
Although the firm caught and notified the representative of the “questionable nature” of some of his trades, the representative continued to make short-term recommendations on these products for months, according to FINRA. By December 2018, he had solicited 131 purchases of the three products in question at a loss on sales, although the firm earned about $578,023 in sales from the issuer and $282,564 in sales commissions from clients, according to FINRA.
That representative was not the only one making short-term recommendations; during the time in question, at least 40 iterations recommended 1,504 common preferred shares and CEF purchases held less than 180 days at a loss on sales; 1253 of them were held between 91 and 180 days. Wells Fargo earned about $1.45 million in sales commissions from issuers and about $316,460 in commissions from customers.
“We take our supervisory responsibilities seriously and have enhanced our supervisory system to better serve our customers,” a Wells Fargo spokesperson said of the settlement. “We are pleased to resolve this matter.”
Without admitting or denying the findings, Wells Fargo agreed to a censure, a $400,000 fine, total restitution of $599,025.29 and disgorgement of approximately $2 million, including interest.