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Wells Fargo Ordered to Pay Restitution of $3.4 Million for Unsuitable Volatility-Linked Exchange-Traded Products

FINRA ordered Wells Fargo Advisors Financial Network, LLC and Wells Fargo Clearing Services, LLC to pay over $3.4 million in restitution to customers who purchased volatility-linked exchange-traded products (ETPs) as the result of unsuitable recommendations, including sales by Wells Fargo representatives who did not fully understand the ETPs' risks and features when recommending them.

AWC #2014042465601

The report states that in recommending these non-traditional products, some Wells Fargo brokers and representatives mistakenly believed that Volatility ETPs could be held long-term as a viable investment hedge strategy when, in fact, these ETPs are generally described as "short-term" investments that "should not be used as part of a long-term buy-and-hold investment strategy."

FINRA wrote that the representatives did not have a reasonable basis to recommend the Volatility ETPs to customers with conservative or moderate risk tolerance and investment objectives, and that once purchased, the reps failed to recommend an appropriate and timely exit from these unsuitable positions, most notably, to conservative and moderate-minded investors.

Investigators concluded that Wells Fargo itself failed to establish and maintain adequate supervisory systems in connection with its Volatility ETP business, and failed to provide reasonable training to registered representatives regarding risks and features associated with ETPs, who, in turn, recommended the products without having a thorough understanding of these attributes.

For instance, investigators found that while Wells Fargo had implemented a policy to prevent retail brokerage customers from purchasing non-traditional ETPs unless they had the most speculative investment objective, this block restriction did not apply to Volatility ETPs, meaning that even the most conservative customers could have realistically purchased unsuitably risky Volatility ETPs, recommended by brokers who were not adequately trained to sell them.

In 2012, FINRA censured Wells Fargo and ordered the firm to pay $641,489 in restitution, plus a $2.1 million fine, for suitability and supervisory violations relating to sales of certain non-traditional (leveraged, inverse, and inverse-leveraged) exchange-traded funds (non-traditional ETFs) from 2008 through 2009.

As for the present ETP censure and restitution order, FINRA found that Wells Fargo sold non-traditional ETPs—including Volatility ETPs—beginning in 2010, and did not prohibit all purchases of these securities in retail accounts until late 2016.

If you have invested with Wells Fargo or another firm, broker, or financial adviser in volatility-linked exchange-traded products, non-traditional ETFs, or another unsuitably risky product sold in contravention of your investment objectives or conservative/moderate risk tolerances, and these improper transactions and use of complex products has proven harmful to your investments or interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.

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The Law Offices of Jonathan W. Evans & Associates - California Securities Fraud Attorney
Located at 12711 Ventura Boulevard, Suite #440 Studio City, CA 91604. View Map
Phone: (800) 699-1881 | Local Phone: (818) 760-9880.
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