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Regulatory Sanctions

Wells Fargo Actively Traded ‘Buy-And-Hold’ Investments in Customer Accounts

June 26, 2018

by Howard Haykin


Wells Fargo Advisors agreed to pay over $5.1 million in fines, disgorgement and prejudgment interest to settle SEC charges that it generated large fees by improperly encouraging retail customers to trade products that were intended to be held to maturity.


RESPONDENT.    Wells Fargo Advisors (“WFA”), which has its principal place of business in St. Louis, MO, is wholly owned by Wachovia Securities Financial Holdings. WSFH, in turn is a wholly-owned subsidiary of Wells Fargo & Company. WFA has been registered with the Commission as a broker-dealer since 1987 and as an investment adviser since 1990. WFA consists of the integrated legacy firms of Wells Fargo Investments (“WFI”) and Wachovia Securities (“Wachovia”). The integration of WFI and Wachovia was completed in January 2011. 


SEC FINDINGS.     From at least January 2009 through June 2013, certain registered reps at WFA and its predecessor WFI improperly solicited customers to redeem their market-linked investments (“MLIs”) early and purchase new MLIs without adequate analysis or consideration of the substantial costs associated with such transactions.They typically did so to realize profits and to use the proceeds from those redemptions to purchase new MLIs. 


An MLI is a fixed maturity financial product … whose interest is determined by the performance of a reference asset or market measure such as an equity or commodity index over the term of the product. MLIs have limited liquidity and significant upfront fees, and accordingly WFA considered them to be products intended to be held to maturity.


In 2011, WFA implemented a policy prohibiting representatives from engaging in “short-term trading” or “flipping” of MLIs. Notwithstanding those restrictions, and despite the adverse economic consequences to WFA customers, certain WFA registered reps apparently did not reasonably investigate or understand the significant costs of MLI exchanges. Meanwhile, supervisory personnel routinely approved these transactions despite internal policies prohibiting short-term trading or "flipping" of the products.


By its actions, WFA willfully violated:

  • Section 17(a)(2) of the Securities Act, which prohibits, directly or indirectly, in the offer or sale of securities, obtaining money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.
  • Section 17(a)(3) of the Securities Act, which prohibits, directly or indirectly, in the offer or sale of securities, engaging in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.


[For further details, click on … SEC Order.]