The Financial Industry Regulatory Authority (FINRA), the US securities industry’s self-regulator, today said that it has fined Wells Fargo & Co $3.4 million over charges that it failed to educate and train its sales force about critical aspects of certain complex financial products it sold to investors.
FINRA found that Wells Fargo failed to implement policies to educate and train its registered representatives in connection with the sale of volatility-linked exchange-traded products (ETPs). The regulator added that due to the lack of adequate education and training, Wells Fargo brokers made false recommendations over the sale of ETPs to customers in light of their investment profiles.
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The regulator pointed to some instances in which the bank’s financial advisors mistakenly believed that those complex products could be used as a long-term hedge on stock positions against a market downturn. But while investors have flocked to these exchange-traded products, the FINRA said that volatility-linked ETPs are short-term trading instruments that degrade significantly over time, making investors vulnerable to big losses if they hold on to them for too long.
Wells Fargo consented to the order without admitting or denying the findings.
FINRA also found that the lender did not adequately train its sales force to recognize the unsuitable product suite, and did not have a proper system in place to detect and unload the products from customer accounts within 30 days.
Susan Schroeder, executive VP of FINRA’s department of enforcement, commented: “FINRA seeks restitution when customers have been harmed by a member firm’s misconduct. We also credit firms that proactively detect and correct issues prior to detection by FINRA, as Wells Fargo did in this matter. Firms soliciting sales of volatility ETPs should already be well aware of the unique risks that they pose – but FINRA’s Regulatory Notice 17-32 is intended to further educate the industry so that member firms can assess their own practices and take appropriate remedial action if necessary.”