Two affiliated Wells Fargo broker-dealers agreed to pay customers in excess of US $3.4 million to resolve charges that, from July 1, 2010, through May 1, 2012, they sold to customers volatility-linked exchange-traded products that were unsuitable for such customers. The Wells Fargo BDs agreed to make such payment to resolve a disciplinary action brought by the Financial Industry Regulatory Authority that claimed the firms regularly made recommendations to purchase such ETPs to unsuitable customers. In part, claimed FINRA, this was because relevant Wells Fargo salespersons believed such products could be used by customers as a hedge on their equity portfolio in case of a market downturn, when, in fact, volatility-linked ETPs are mostly a short-term trading product that deteriorates in value over time.
In 2009, said FINRA, the Wells Fargo BDs placed restrictions on which retail customers could purchase non-traditional ETPs; however, they did not extend the restrictions to volatility-linked ETPs until May 2012. FINRA said no fine was warranted in this disciplinary action because (1) prior to detection by FINRA in 2012, the Wells Fargo BDs detected and corrected their purported “supervisory deficiencies” related to volatility-linked ETPs; (2) the firms were previously fined US $2.1 million in May 2012 for similar violations in connection with non-traditional ETPs; and (3) the firms substantially assisted FINRA in determining the amount of restitution that should be paid to customers.
Simultaneously with publication of the disciplinary action against the Wells Fargo BDs, FINRA published a reminder to members of sales practice obligations for volatility-linked ETPs (click here to access).
My View: It is refreshing to see a regulator identify a potential rule infraction by a regulated entity and not automatically fine the entity because the regulator recognized that the entity had proactively identified and remedied the problem and cooperated with the regulator. The Commodity Futures Trading Commission recently announced a new program where it would give substantial penalty discount to a person if it promptly self-reported a rule violation; fully cooperated with the CFTC’s investigation of the issue; and remediated the problem. (Click here for details in the article “New Math: Come Forward + Come Clean + Remediate = Substantial Settlement Benefits Says CFTC Enforcement Chief” in the October 1, 2017 edition of Bridging the Week.)