The Securities and Exchange Commission says Wells Fargo will pay $35 million over shortcomings with its investment recommendation practices.
The regulator charged Wells Fargo
Clearing Services and Wells Fargo
Advisors Financial Network with failure to supervise and train investment
advisors and registered representatives
recommending single-inverse ETF
investments to retail investors; it also
said the bank lacked adequate compliance policies and procedures tied to the
suitability of these recommendations.
Inverse exchange-traded funds use
various derivatives to profit from a
decline in the value of an underlying
benchmark and/or to hedge a portfolio
from a decline; they also are known as
“short” or “bear” ETFs. Single-inverse
ETFs, referred to as 1X (for “one times”)
products, are 100% hedged vs. other
products (2X and 3X), which are 200%
and 300% hedged, respectively.
The latest settlement comes less than
a week after Wells Fargo agreed to pay
$3 billion to the SEC and Department
of Justice to resolve potential criminal and civil charges tied to its fake-accounts scandals.
From April 2012 through September
2019, the bank’s policies and procedures
“were not reasonably designed to prevent and detect unsuitable recommendations of single-inverse ETFs,” the SEC
said in late February when it announced
The regulator concluded that some
Wells Fargo brokers and advisors didn’t
“fully understand the risk of losses
these complex products posed when
held long term,” which led to some
clients to buy and hold single-inverse
ETFs for months or years. Plus, a num-
ber of the clients were senior citizens
and retirees with limited incomes and
net worth, and conservative or moder-
ate risk tolerances.
“Firms must maintain effective com-
pliance and supervisory programs to
ensure that the securities they recom-
mend are suitable for their clients,” said
Antonia Chion, associate director of
the SEC Enforcement Division. “As a
result of Wells Fargo’s failure to meet
these important obligations, some of
its employees recommended complex
instruments to retail investors who did
not understand the risks involved.”
Without admitting or denying the
findings, the bank agreed to pay a $35
million penalty and distribute the funds
to some clients who were recommended
to buy single-inverse ETFs and suffered
losses after holding the positions for
longer periods, according to the SEC.
Its order also censures Wells Fargo
and requires it to cease and desist from
committing or causing any future violations of the relevant provisions.
“Wells Fargo Advisors settled claims
with the U.S. Securities and Exchange
Commission related to our policies and
procedures and supervision of single-inverse exchange-traded funds (‘
single-inverse ETFs’). Wells Fargo Advisors
no longer sells these products in the
full-service brokerage,” the bank said in
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