Bank Regulation

Wells Fargo To Pay $3.4M Fine Over Complex ETPs

The Financial Industry Regulatory Authority (FINRA) announced news on Monday (Oct. 16) that it has ordered Wells Fargo Clearing Services and Wells Fargo Advisors Financial Network to pay more than $3.4 million in restitution for making bad recommendations of volatility-linked, exchange-traded products (ETPs).

In a press release, FINRA said the fine is related to supervisory failures; Wells Fargo representatives didn’t understand the risks associated with investments in the exchange-traded products but still recommended them to clients.

“Volatility-linked ETPs are complex products that could be misunderstood and improperly sold by registered representatives. Certain Wells Fargo representatives mistakenly believed that the products could be used as a long-term hedge on their customers’ equity positions in the event of a market downturn. In fact, volatility-linked ETPs are generally short-term trading products that degrade significantly over time and should not be used as part of a long-term, buy-and-hold investment strategy,” the Financial Industry Regulatory Authority said in the press release.

According to FINRA, Wells Fargo didn’t put in place a reasonable system to supervise sales of the products. However, the banking firm did take remedial action to correct the supervisory deficiencies in May of 2012 after FINRA had detected problems; around this time, Wells was fined for similar violations related to the sale of leveraged and inverse ETPS.

“FINRA seeks restitution when customers have been harmed by a member firm’s misconduct,” stated Susan Schroeder, executive vice president of FINRA’s Department of Enforcement, in the press release. “We also credit firms that proactively detect and correct issues prior to detection by FINRA, as Wells Fargo did in this matter.” FINRA said Wells Fargo didn’t admit nor deny the violations in settling with FINRA, but consented to the entry of the findings by the corporation.

Separately, Reuters reported that the state of California will extend sanctions put in place last year because of the banking firm’s fake account scandals, for another year or more. Citing Treasurer John Chiang, Reuters reported that while Chiang has seen progress in certain parts of Wells Fargo, he is concerned about the “alarming drumbeat of news reports of egregious or illegal actions over the past year.”

In a statement to Reuters, Wells Fargo spokesman Gabriel Boehmer said the bank “is in the business of banking, not politics,” and that it has “met and exceeded all of Treasurer Chiang’s expectations.”

The sanctions included preventing Wells Fargo from acting as an underwriter on state bond sales, deferring all state investments in the embattled bank and suspending Wells Fargo from acting as a broker-dealer for investment settlements.

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