Wells Fargo Clearing Services and Wells Fargo Advisors Financial Network, of St. Louis, Missouri, have been censured and collectively fined $650,000.00 by Financial Industry Regulatory Authority (FINRA) based on findings that Wells Fargo failed to supervise stockbrokers’ unit investment trust trades in customer accounts. Letter of Acceptance, Waiver, and Consent No. 2016050947801 (December 13, 2021).
According to the AWC, from July 1, 2013, to June 30, 2019, approximately $27,000,000,000.00 in unit investment trust (UIT) transactions had been made in 123,000 Wells Fargo customer accounts. The AWC states that purchases of UITs totaled $15,600,000,000.00, and $1,800,000,000.00 of this involved early UIT rollovers, where investors sold UITs at least three months before maturity to buy new UITs. FINRA states that $213,200,000.00 in early rollovers involved series-to-series rollovers, where proceeds from a UIT sale were used to buy another UIT in a new series. Those series-to-series rollovers involved customers selling products to purchase new products with the same or similar strategies and objectives.
The AWC states that written supervisory procedures at Wells Fargo cautioned against using UITs for anything other than a buy-and-hold strategy. The procedures described suitable transactions as those where investors held their UITs until they matured – not where they sold UITs prematurely to purchase new ones. The switching of UITs had to be reviewed by supervisors at Wells Fargo to ensure that the benefits would not be outweighed by sales charges. Supervisors at Wells Fargo were also supposed to look for any patterns or trends of inappropriate switching and to take action to prevent unsuitable transactions.
Wells Fargo failed to use a supervision system that could detect early UIT rollovers. An automated report detected when a UIT or mutual fund would be sold 25 days before the purchase of the same products. Switch letters were sent to customers by Wells Fargo when the securities broker dealer identified a switch. However, there was no report that displayed how long investors held the UITs before selling them, so the securities broker dealer maintained no system to identify if rollovers occurred well before maturity.
FINRA states that on thousands of occasions, possibly unsuitable series-to-series rollovers were recommended by Wells Fargo stockbrokers. And on many occasions, there was no appropriate method in place for Wells Fargo to identify when stockbrokers caused customers to incur sales charges by acting on the potentially unsuitable recommendations relating to early rollovers, including series-to-series rollovers.
FINRA found that Wells Fargo violated Rules 2010 and 3110 and National Association of Securities Dealers (NASD) Rule 3010.
