Wells Fargo Advisors Financial Network and Wells Fargo Clearing Services have agreed to pay more than $2 million in restitution and fines as part of a settlement over variable annuity supervisory violations, according to Finra.
More than $1.4 million in restitution, plus interest, will be paid to around 100 customers and fines totaling $675,000 will be paid to Finra.
Finra found that from January 2011 through August 2016 Wells Fargo failed to supervise the suitability of recommendations that customers switch from variable annuities to investment company products, such as mutual funds or unit investment trusts.
The firms have directives in their supervisory procedures that require supervisors to review the suitability of any product switch by considering the comparative costs and benefits associated with the new and existing products, according to Finra.
However, the firms did not obtain sufficient data from variable annuity issuers to review the suitability of variable annuity surrenders and subsequent switches, including surrender fees, Finra says.
Wells Fargo’s procedures also require the firms to send switch letters to clients, which would have confirmed customers’ understanding of the transaction, as well as related risks and expenses, according to Finra.
The procedures require that the letters be sent “automatically” based on alerts generated by the firms’ supervisory systems, according to Finra. However, Finra says the firms did not actually have an alert in place to identify switches from variable annuities to investment company products from January 2011 through August 2016. Finra adds that the firms did not send switch letters to affected customers.
Citing an example, Finra says one former representative recommended that a customer liquidate a variable annuity with a surrender value of $126,681 — which caused the customer to pay a surrender fee of $5,070. That former representative, who Finra did not identify, then used the proceeds to purchase Class A mutual funds with upfront sales charges totaling $5,531, according to the self-regulator.
In that particular example, in addition to causing the customer to incur $10,601 in surrender fees and upfront sales charges, the recommended switch resulted in the customer earning less annual income than she would have earned had she not sold the variable annuity, according to Finra.
“Firms must have a reasonable supervisory system in place to detect potentially unsuitable switches. Wells Fargo failed to meet this standard. We are pleased that customers will receive restitution for surrender fees and sales charges incurred as a result of these recommendations,” Jessica Hopper, head of Finra’s Department of Enforcement, says in a statement.
In settling this matter, the two firms neither admitted nor denied the charges but consented to the entry of Finra’s findings.
In August 2016, the firms 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, according to Finra.
Previous settlement over other supervisory failures
The latest sanction from Finra follows a previous settlement between Wells Fargo and the self-regulator over other supervisory failures.
Wells Fargo Advisors agreed to pay more than half a million dollars to settle allegations that it failed to supervise its registered representatives whose overconcentration of client assets in certain securities resulted in millions of dollars in losses for customers.
Between November 2012 and October 2015, the company allegedly failed to supervise two of its former advisors, Charles Frieda and Charles Lynch, and also failed to reasonably investigate several red flags about the investments’ suitability, according to a letter of acceptance, waiver and consent published by Finra.
Wells Fargo agreed to a censure and to pay a $350,000 fine as well as $201,498 in restitution, plus interest, to the three customers it had not already compensated. But the company did not admit or deny those Finra findings.
This is an updated version of a breaking news article that was published on Sep. 2, 2020.
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