Wells Fargo Clearing Services LLC a securities broker dealer headquartered in Saint Louis Missouri has been censured and fined $625,000.00 by Financial Industry Regulatory Authority (FINRA) supported by findings that Wells Fargo failed to supervise the suitability of customers’ switches from variable annuities to other investment products through transactions initiated by Wells Fargo stockbrokers. Letter of Acceptance Waiver and Consent No. 2016052124001 (Sept. 1, 2020).
According to the AWC, between January of 2011 and August of 2016, customers of Wells Fargo had been advised by stockbrokers to switch 50,000 variable annuities worth a total of $5,000,000,000.00. Written supervisory procedures used by the securities broker dealer called for supervisors to review the exchanges or replacements of annuities to assess whether transactions were appropriate for customers.
The procedures indicated that supervisory personnel were to evaluate the costs of customers’ existing products with replacement products consisting of either insurance policies or investment company products. Wells Fargo supervisors were also supposed to take into consideration the benefits and features of both products prior to determining which one made more sense for the customers.
The AWC also revealed that Wells Fargo’s written supervisory procedures mandated that switch letters be sent to its customers so that those customers were able to understand the ramifications of the transactions. Wells Fargo did none of these things at times when customers were advised by its stockbrokers to replace annuities with other investments.
Wells Fargo’s written supervisory procedures additionally called for its use of an alert system in which there would be adequate notifications provided to supervisors regarding customers’ switches. There was no alert system used by Wells Fargo and this prevented the securities broker dealer from providing customers with switch letters. The AWC indicated that Wells Fargo did not assess data held by issuers of those annuities and this prevented the securities broker dealer from determining whether it was appropriate for customers to switch their annuities in light of surrender penalties.
The AWC stated that 101 possibly unsuitable switches were recommended to customers by stockbrokers at Wells Fargo. In one case, a customer was advised to liquidate an annuity that had an account balance of $126,681.00. By following this advice, the customer paid $5,070.00 in surrender charges followed by $5,531.00 in sales charges for class A mutual fund purchases. FINRA noted that the customer was not able to generate as much income on an annual basis through the mutual funds as the customer would have been able to generate through their existing annuity.
In another situation, a customer was advised by a Wells Fargo stockbroker to surrender a $180,500.00 variable annuity which led the customer to face surrender charges of $6,458.00 in addition to $7,579.00 in upfront sales charges for unit investment trust and mutual fund purchases. That customer’s annual income went down instead of up by following the recommendations of the Wells Fargo stockbroker.
FINRA indicated that the failure of Wells Fargo to supervise suitability of these switches precluded it from knowing whether the transactions were reasonable given the customer’s objectives for investing and their financial needs. The AWC reported that $1,445,167.50 in possibly inappropriate surrender fees and upfront sales charges had been incurred by customers. FINRA determined that Wells Fargo’s failure to supervise in this respect constituted the violations of FINRA Rules 2010 and 3110 as well as National Association of Securities Dealers (NASD) Rule 3010.