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How Wells Fargo Settled with the SEC on Mutual Fund Sales Violations
by Howard Haykin
RESPONDENTS. Wells Fargo Clearing Services, based in St. Louis, MO, has been registered as an investment adviser (“RIA”) since 1990 and as a broker-dealer since 1987. In December 2018, the RIA reported assets under management of $473 billion. Wells Fargo Advisors Financial Network, also based in St. Louis, MO, has been registered as an RIA since 2000 and as a broker-dealer since 1983. In December 2018, this RIA reported AUM of $49 billion.
CASE SUMMARY. These proceedings arise out of breaches of fiduciary duty and inadequate disclosures by the two RIAs - Wells Fargo Clearing Services and Wells Fargo Advisors Financial Network (hereafter, referred together as “Wells Fargo”) - in connection with mutual fund share class selection practices and the fees they received pursuant to Rule 12b-1 under the Investment Company Act of 1940 (“12b-1 fees”). At times during the period, January 2014 through July 2015 (the “Relevant Period”):
- Wells Fargo purchased, recommended, or held for advisory clients mutual fund share classes that charged 12b-1 fees instead of lower-cost share classes of the same funds for which the clients were eligible.
- Wells Fargo received 12b-1 fees in connection with these investments.
- Wells Fargo failed to disclose in [its] [their] Forms ADV or otherwise the conflicts of interest related to (a) their receipt of 12b-1 fees, and/or (b) their selection of mutual fund share classes that pay such fees.
Wells Fargo self-reported to the SEC the violations discussed in this Order, pursuant to the SEC Enforcement’s Share Class Selection Disclosure Initiative, that was launched in February 2018. This Administrative Proceeding and Wells Fargo’s settlement offer are based on the information self-reported by the two firms.
SETTLEMENT TERMS. Wells Fargo will pay a total of $17,354,000 to affected investors - $15,037,000 in disgorgement, and $2,327,000 in prejudgment interest. In addition, Wells Fargo will (within 30 or 40 days) …
- review and correct as necessary all relevant disclosure documents concerning mutual fund share class selection and 12b-1 fees.
- evaluate, update (if necessary), and review for the effectiveness of their implementation, Respondents’ policies and procedures so that they are reasonably designed to prevent violations of the Advisers Act in connection with disclosures regarding mutual fund share class selection.
- notify affected investors of the settlement terms of this Order in a clear and conspicuous fashion.
- certify, in writing, compliance with the undertakings.