Wells Fargo Clearing Services, a securities broker dealer headquartered in Saint Louis, Missouri, has been censured and fined $400,000.00 because Wells Fargo failed to prevent its financial advisors from recommending unsuitable short-term trading of certain financial products to customers. Letter of Acceptance, Waiver, and Consent No. 2019061442702 (September 12, 204).
According to the AWC, from January 2017 to December 2018, Wells Fargo permitted its representatives to sell syndicate preferred stocks, closed-end funds (CEFs), and medium-term notes (MTNs)—all types of income-generating securities. FINRA stated that these investments are typically purchased by investors who want regular and stable income, similar to bonds or dividend-paying stocks, and are meant to be held for a long period of time. For instance, preferred stocks pay fixed dividends, and CEFs often invest in a portfolio of bonds or stocks that provide regular income. Medium-term notes, another type of fixed-income investment, are also structured to provide consistent payments to investors.
In these transactions, Wells Fargo earned commissions and fees from both the initial purchase and the subsequent sale. While customers experienced financial losses, representatives continued to earn these fees by encouraging repeated trades. The regulator found that this practice was problematic because the investments were not suitable for short-term trading, and the rapid buying and selling of these products did not align with customers’ best interests.
FINRA also found that Wells Fargo failed to maintain reasonable oversight to address this problem. The securities broker dealer had an automated system to flag trades held for less than 90 days, but the system missed many trades that occurred between 91 and 180 days. This gap allowed inappropriate trading to go undetected. Even when short-term trades were flagged, Wells Fargo did not take meaningful action, allowing the misconduct to continue. For example, in some cases, Wells Fargo supervisors noticed that certain representatives were engaging in short-term trading and spoke to them about it, but they did not stop the activity. In another case, a representative continued to recommend short-term trading even after being warned that this activity was leading to customer losses and excessive commissions.
The securities broker dealer also had flawed written supervisory procedures. Although the company’s policies stated that these products were generally intended to be held long-term, the policies did not provide specific guidance on what short-term trading was or how long the investments should be held.
FINRA found that Wells Fargo violated FINRA Rule 3110(a), as the securities broker dealer did not maintain a supervisory system designed to ensure that its representatives were complying with securities laws and rules. Wells Fargo also violated FINRA Rule 3110(b) and 2010, as its written procedures were not adequate to prevent unsuitable trading.
