Wells Fargo Advisors and Wells Fargo Clearing Services will pay $35 million in fines for failing to adequately supervise and train financial advisors according to an SEC order that found Wells Fargo representatives unsuitably recommended that certain clients buy and hold single-inverse exchange-traded funds (ETFs) not designed for risk-averse, long-term investors, resulting in millions of dollars in losses.
Inverse ETFs are complex products (other complex ETF products include leveraged or inverse-leveraged ETFs) generally considered unsuitable for certain unsophisticated investors and those with conservative or moderate risk tolerances. Furthermore, the single-inverse ETFs at the heart of the SEC investigation were not designed to be held long-term.
The SEC found that Wells Fargo's inexperienced and conservative/moderate investors—despite having been identified to the firm as risk-averse, some with clearly stated long-term investment horizons—nonetheless received unsuitable recommendations from Wells Fargo advisors to purchase and hold single-inverse ETFs, which in this case were largely intended as short-term vehicles and, thus, unsuitable for long-term holding.
Investigators wrote that, "Wells Fargo systematically failed to implement its policy that non-traditional ETFs that reset daily typically should not be held longer than one trading session," and found that despite this policy of not holding such products for longer than one trading session, Wells Fargo advisers nonetheless recommended that clients hold the products for a long-term period.
Accordingly, the findings state that because these investors did not adequately understand the risk of losses, and because in some cases the Wells Fargo representatives themselves did not adequately understand the ETFs or monitor the positions, Wells Fargo effectively made unsuitable recommendations that put investors in harm's way when the ETFs were unsuitably held over an extended period of time.
The SEC concluded that as a result of Wells Fargo's ETF suitability misconduct, "the clients collectively sustained millions of dollars of losses in the product by holding the positions."
The federal regulator's report notes that FINRA previously sanctioned Wells Fargo for similar conduct regarding supervisory deficiency, and that the firm had attested to enhancing its policies and procedures as a result.
Despite this attestation, the SEC found that Wells Fargo's policies and procedures remained inadequate, that its single-inverse ETF policies lacked advisor training requirements, and that Wells Fargo failed to adequately implement those policies it did have in place. Investigators described Wells Fargo's implementation practices as containing "widespread failures."
The SEC report notes that Wells Fargo's misconduct persisted through September 2019.
If you have invested with Wells Fargo Advisors or any broker or investment adviser who unsuitably recommended you buy and hold a risky complex product designed for short-term trading—such as a single-inverse ETF—and this clearly unsuitable investment strategy has proven harmful to your financial interests or otherwise resulted in losses/damages, please call an experienced FINRA arbitration attorney at The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.