Wells Fargo Subsidiaries Ordered to Pay $3.4 Million to Customers
FINRA announced on October 16, 2017 that Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC have agreed to a settlement in which Wells Fargo would pay $3.4 million as restitution to certain customers. The settlement relates to the sales of volatility linked exchange traded products (ETPs) to numerous retail customers.
ETPs refer to products such as exchange-traded funds (“ETFs”) and exchange traded notes (“ETNs”) that have become very popular investment vehicles in the United States in the past several years. These products are comprised of “baskets” of underlying assets, such as stocks, commodities, etc. ETPs can be structured to mirror the performance of the underlying basket of securities or provide returns opposite the performance of the underlying basket (inverse ETPs). By utilizing derivative products, they can seek to enhance the performance of the underlying basket (leveraged ETPs).
The ETPs involved in this matter were benchmarked to the Chicago Board of Options Exchange Volatility Index (symbol VIX) futures, not the VIX itself. Volatility linked ETPs such as these are highly likely to lose value over time. As such, according to FINRA, they may be inherently unsuitable for many retail investors.
The time period involved in FINRA’s inquiry was 2010 to 2012. FINRA findings, to which Wells Fargo consented, included that Wells Fargo representatives sold these ETPs to buy-and-hold customers with conservative investment objectives. These are clearly the types of investors, in FINRA’s determination, for which these products are unsuitable.
FINRA also found that Wells Fargo failed to establish a reasonable system of supervision to ensure that its sales force was properly trained to recommend these products to investors.
FINRA noted that Wells Fargo was fined $2.7 million in 2012 relating to its failure to properly supervise the sales of leveraged ETFs to customers. However, the circumstances involving the current matter were discovered and disclosed by Wells Fargo during the course of its internal review of the 2012 FINRA investigation. Therefore, FINRA chose to not impose a fine over and above the restitution payments to be made in this case.
FINRA has also released a Regulatory Notice reminding firms of their supervisory obligations regarding the sale of volatility linked ETPs.
This matter highlights the fact that many complex investment products available from brokerage firms may be unsuitable for most retail customers. Customers should make sure they fully understand how a particular product works, and the risks of that product, before agreeing to make an investment. If you have questions or concerns regarding a particular product, or the handling of your account, contact the experienced securities arbitration attorneys at Lubiner, Schmidt & Palumbo.