Wells Fargo Advisors, a FINRA member Firm since 1987 headquartered in St. Louis, Missouri, conducts retail brokerage / wealth management business via 7,000 branch offices and employs roughly 25,000 registered reps. The Firm, in proposing settlement of rule violations alleged by FINRA without admitting or denying the findings, consented to a FINRA censure and fine of $500,000 in connection with allegations Wells Fargo Advisors lacked a reasonable basis in the recommendation of Structured Repackaged Asset-Backed Trust Securities (“STRATS”) to its retail customer base, failed to disclose risks of such investments in institutional sales literature, and failed to educate its registered representative sales team on risks of such products. FINRA Letter of Acceptance, Waiver and Consent No. 2012033568901 (Aug. 3, 2015).
FINRA Letter of Acceptance, Waiver & Consent
According to the FINRA Letter of Acceptance, Waiver and Consent (AWC), from August of 2005 to July of 2012, Wells Fargo Advisors, an affiliate of Wells Fargo & Company and Wells Fargo Bank N.A., sold roughly $12M STRATS via primary and secondary markets to its retail customer base. STRATS, according to FINRA, are complex products that pay a fluctuating rate of income to the investor, typically with minimum and maximum rate parameters, based on the STRATS Trust’s interest in an underlying capital security and via interest rate swap agreement. According to the AWC, the Firm’s STRATS sold to investors swapped the yield of a JP Morgan capital security paying 5.85% in return for a variable rate tied to a 90 day United States Treasury + 1%, containing a minimum return of 3% and maximum of 8%.
The AWC indicated that despite Wells Fargo Advisors providing training on structured products, such training was inadequately designed to address the unique aspects of STRATS. The AWC stated that the Firm failed to provide information about the risks of such products on their intranet page – specifically regarding risks to the customer’s principal should there be a redemption of the underlying capital security (a redemption that could be executed by JP Morgan).
Given the prospectus terms of the STRAT as described in the AWC, upon termination of the investment security, customers were expected to receive an amount calculated by taking the redemption proceeds of underlying security, adding interest earned, and subtracting the termination fee. According to the AWC, customers could face significant principal losses as a result of the termination fee. However, as the AWC indicates, the Firm’s RR’s failure to be aware of such risks resulted in their inability to inform their customers of such risks in the course of making recommendations of the STRATS. The AWC further indicates that upon JP Morgan’s redemption of the underlying capital security in July of 2012, customers ultimately received less (in some cases – much less), than their initial investment.
The AWC states that FINRA found that Wells Fargo Advisors’ violated NASD Rules 2110 and 2310(a) and FINRA Rule 2010 as a result of the registered reps’ limited understanding of the STRAT termination provisions, causing them to lack a reasonable basis in the recommendation of STRATS to its customer base. Additionally, the AWC indicates that the Firm violated NASD Rules 2110 and 2211(d) and FINRA Rule 2010 for failing to disclose the risks of the STRATS in the Firm’s institutional sales literature (internal-use material that FINRA claimed was not fair, balanced, or provided a reasonable basis to evaluate risks). Finally, the AWC indicates that based on the failure to establish a supervisory system tailored to ensure compliance with FINRA suitability rules, the Firm violated NASD Rules 2110 and 3010(a) and FINRA Rule 2010 for failing to educate its registered reps on the risks customers faced with regard to investments in STRATS.
Former Wells Fargo Advisors Violations
This is not the first time Wells Fargo Advisors has been subject to the aforementioned violations by FINRA. In May, 2013, FINRA censured the Firm and fined them $1.25M and ordered restitution of nearly $2M to aggrieved customers in connection with allegations that the Firm made unsuitable recommendations to its customers in the purchase of floating rate loans that ultimately resulted in substantial losses. FINRA Letter of Acceptance, Waiver and Consent No. 2008014350501 (May 2013).
Additionally, in January 2008 – June 2009, FINRA censured the Firm and fined them $2.1M, ordering restitution of $641,489 to aggrieved customers in connection with allegations that the Firm made unsuitable recommendations to its customers in the purchase of inverse, leveraged, and leveraged-inverse exchange trade funds that resulted in considerable losses to customers, while also failing to supervise compliance procedures regarding FINRA suitability rules. FINRA Letter of Acceptance, Waiver and Consent No. 2009019113901 (April 2012).
Wells Fargo Advisors, in November 2011, was censured and fined $2M and ordered restitution of approximately $2M to the affected customers in connection with allegations the Firm made unsuitable recommendations to its customer base in the purchase of reverse convertibles which resulted in substantial losses to such customers, while also failing to supervise compliance procedures regarding FINRA suitability rules. FINRA Letter of Acceptance, Waiver and Consent No. 2008015651901 (November 2011).
Guiliano Law Group
Investors suffering losses or damages caused by Wells Fargo Advisors in connection with the aforementioned conduct may be able to recover their investment losses. Our practice is limited to the representation of investors in claims, for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost to you unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.
