The SEC said that some brokers recommended certain products without understanding the risks involved
Having a full understanding of investment products, including the risks involved, would seem to be an essential ingredient of a financial advisor.
But one of Wall Street’s largest investment banks failed to ensure that its employees were aware of the risks of single-inverse ETF investments when they recommended them to clients, according to allegations made by the SEC.
Wells Fargo was ordered to settle the claims by paying $35 million Thursday, which will be paid to those investors that were affected including seniors and retirees, some with limited incomes and net worth and conservative or moderate risk tolerances.
The bank agreed to the payment without admitting or denying the charges and says that it no longer offers the ETF product concerned.
The SEC says that Wells Fargo’s internal guidance noted that when single-inverse ETF products are held for longer than one day there is risk of large and unexpected losses, especially in a volatile market.
Inadequate policies
However, it said that the bank’s procedures during a seven year period were not reasonably designed to adequately prevent and detect unsuitable recommendations of these products.
The regulator was concerned about a lack of supervision and training of employees relating to the sale of single-inverse ETFs and that some of its brokers were unaware of the risk of holding the products long term, leading to recommendations to hold them for months or sometimes years.
"Firms must maintain effective compliance and supervisory programs to ensure that the securities they recommend are suitable for their clients," said Antonia Chion, Associate Director of the SEC Enforcement Division. "As a result of Wells Fargo's failure to meet these important obligations, some of its employees recommended complex instruments to retail investors who did not understand the risks involved."
The SEC’s order also censures Wells Fargo and requires it to cease and desist from committing or causing any future violations of the relevant provisions.
