Two Wells Fargo subsidiaries were ordered to pay a total of more than $2 million due to supervisory failures regarding the switching of customers’ variable annuities, the Financial Industry Regulatory Authority (FINRA) announced Sept. 2.
Wells Fargo Clearing Services and Wells Fargo Advisors Financial Network must pay more than $1.4 million in restitution, plus interest, to approximately 100 customers who incurred unnecessary surrender fees and upfront sales charges when their variable annuities were switched. The firms also must pay an additional $675,000 in fines, with Wells Fargo Clearing Services paying $625,000 and Wells Fargo Advisors Financial Network making up the other $50,000.
“Firms must have a reasonable supervisory system in place to detect potentially unsuitable switches,” said Jessica Hopper, executive vice president and head of FINRA’s Enforcement Department, in a press release. “Wells Fargo failed to meet this standard.”
According to FINRA, from January 2011 through August 2016, Wells Fargo “failed to establish and maintain a supervisory system and failed to enforce written supervisory procedures (WSPs) that were reasonably designed to achieve compliance with FINRA’s suitability rule as it pertains to switches from variable annuities to investment company products.” As a result, Wells Fargo violated NASD Rule 3010, FINRA Rule 3110, and FINRA Rule 2010.
Despite directives in the firm’s WSPs that “qualified supervisors” review the suitability of any product switch by “considering the comparative costs associated with the new and existing investments, and the comparative features and benefits of both investments,” FINRA said, “Wells Fargo failed to ensure that such reviews happened when its representatives recommended that customers switch from a variable annuity to an investment company product.”
Additionally, according to FINRA, “Wells Fargo’s procedures also required the firms to send switch letters to clients, which would have confirmed customers’ understanding of the transaction, as well as related risks and expenses.” However, switch letters to affected customers were never sent.
In settling this matter, Wells Fargo neither admitted nor denied the charges but consented to FINRA’s findings. FINRA noted these firms in August 2016 “took several steps to improve their supervision of switches involving variable annuities, including developing a switch alert to identify when the proceeds from a variable annuity liquidation are used to purchase an investment company product.”
In a separate action, FINRA on Aug. 28 ordered Wells Fargo to pay a fine of $350,000 and restitution of $201,498, plus interest, also having to do with supervisory failures. “Between November 2012 and October 2015, two former firm representatives—Charles Frieda and Charles Lynch—recommended that many of their customers invest a substantial portion of their assets at Wells Fargo in four high-risk energy securities,” FINRA said. “The representatives’ conduct generated multiple red flags regarding overconcentration in their customers’ account that raised suitability concerns that Wells Fargo failed to reasonably investigate.”
Consequently, the firm failed to reasonably supervise the activities of Frieda and Lynch, violating NASD Rule 3010(a) and FINRA Rules 3110(a) and 2010. “Because of Frieda and Lynch’s recommendations, 70 of their customers lost a total of more than $10 million when prices of energy securities prices plummeted in 2014 and 2015,” FINRA said.
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