The Financial Industry Regulatory Authority (FINRA) has ordered Wells Fargo Advisors, LLC (Wells Fargo) to pay a $500,000 fine and $241,974.34 plus pre-judgment interest in restitution to customers for allegedly making unsuitable recommendations to customers to purchase structured repackaged asset-backed trust securities (STRATS).
From approximately 2005 to 2012, Wells Fargo made unsuitable STRATS recommendations to its retail customers, selling nearly $12 million worth of the complex structured products. According to FINRA, Wells Fargo failed to properly educate its registered representatives about the risks associated with STRATS and that the customers had the potential to suffer significant losses. FINRA also found that Wells Fargo’s internal-use STRATS brochures were not fair and balanced and neglected to provide an appropriate basis for evaluating the risks and therefore the suitability of the STRATS. Wells Fargo did not admit to or deny FINRA’s findings.
The STRATS were complex structured products that paid a floating rate of periodic income up to a minimum or maximum rate based on the STRATS Trust’s interest in a capital security issued by JP Morgan Chase and the STRATS Trust’s interest in an interest rate swap contract. The STRATS could be terminated for several reasons, one of which was the call or redemption of the underlying JP Morgan capital security. The amount the investor would receive is determined by the amount of the termination fee under the swap contract. The termination fee was important because investors could lose a significant percentage of their principal investment if certain events occurred, including the redemption of the underlying JP Morgan capital security as occurred in this case.
Although Wells Fargo financial advisors receive basic training on structured products, it appears that none of the training related specifically to the unique features of the STRATS. The brokerage firm’s internet broker education pages did not have any information concerning the risks of investing in these products, and specifically did not address the risks to customer principal in the event of a redemption of the underlying JP Morgan capital security.
More importantly, FINRA found that because of the poor training, Wells Fargo financial advisors lacked a reasonable basis for recommending the STRATS to retail customers. Both the brokerage firm and the financial advisors have responsibilities for determining the suitability of the investments for customers in general and specifically for the customer’s investment being recommended by the financial advisor. FINRA fined Wells Fargo for failing to adequately inform its sales force of material facts necessary to make any recommendations to any of the retail customers. Further, it found that Wells Fargo registered representatives did not comprehend the risks to customers and thus lacked a reasonable basis for recommending any of the STRATS to any of the firm’s retail customers.
In order to protect customers, FINRA rules require broker-dealers to establish and implement a reasonable supervisory system. These rules require supervisors to monitor firm activities to ensure they comply with federal and state securities laws, securities industry rules and regulations, as well as the brokerage firm’s own policies and procedures. If broker-dealers do not establish and implement such protective measures, they may be liable to account holders for damages stemming from a lack of training and/or supervision. As a result, investors who have been sold an unsuitable investment by their broker can bring forth claims to recover damages against broker-dealers like Wells Fargo Advisors, which have a duty to properly educate its registered representatives in order to protect their customers’ interests and investments.
Has your Wells Fargo broker recommended any misrepresented or unsuitable structured product? If so, call Robert Pearce at the Law Offices of Robert Wayne Pearce, P.A. for a free consultation. Mr. Pearce is accepting clients with valid claims against Wells Fargo stockbrokers for unsuitable recommendations, misrepresentations, and/or other fraudulent and illegal conduct.
The most important of investors’ rights is the right to be informed! This Investors’ Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 40 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities, and investment law issues. The lawyers at our law firm are devoted to protecting investors’ rights throughout the United States and internationally! Please post a comment, call (800) 732-2889, send Mr. Pearce an email at email@example.com, and/or visit our website at www.secatty.com for answers to any of your questions about this blog post and/or any related matter.