FINRA Sanctions Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC More Than $2 Million for Supervisory Violations Related to Variable Annuity Switches
Firms to Pay $1.4 Million in Restitution to Approximately 100 Affected Customers
WASHINGTON—FINRA announced today that Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC (Wells Fargo) have agreed to pay more than $1.4 million in restitution, plus interest, to approximately 100 customers and fines totaling $675,000 for failing to supervise recommendations that customers switch from variable annuities to investment company products.
FINRA found that from January 2011 through August 2016 Wells Fargo failed to supervise the suitability of recommendations that customers sell a variable annuity and use the proceeds to purchase one or more investment company products, such as mutual funds or unit investment trusts. In spite of directives in the firms’ supervisory procedures that supervisors review the suitability of any product switch by considering the comparative costs and benefits associated with the new and existing products, the firms did not obtain from variable annuity issuers data sufficient to review the suitability of variable annuity surrenders and subsequent switches, including surrender fees. Wells Fargo’s procedures also required the firms to send switch letters to clients, which would have confirmed customers’ understanding of the transaction, as well as related risks and expenses. Although the procedures required that such letters be sent “automatically ... based on alerts generated by [the firms’] supervisory system[s], unless withheld by the qualified supervisor,” the firms did not, in fact, have a switch alert to identify switches from variable annuities to investment company products during the relevant period and the firms did not send switch letters to affected customers.
As a result, between January 2011 and August 2016, Wells Fargo’s representatives recommended at least 101 potentially unsuitable switches that required customers to incur both surrender fees and substantial new sales charges. For example, one former representative recommended that a customer liquidate a variable annuity with a surrender value of $126,681—which caused the customer to pay a surrender fee of $5,070—and then use the proceeds to purchase class A mutual funds with upfront sales charges totaling $5,531. In addition to causing the customer to incur $10,601 in surrender fees and upfront sales charges, the recommended switch resulted in the customer earning less annual income than she would have earned had she not sold the variable annuity.
Jessica Hopper, Executive Vice President and Head of FINRA’s Department of Enforcement, said, “Firms must have a reasonable supervisory system in place to detect potentially unsuitable switches. Wells Fargo failed to meet this standard. We are pleased that customers will receive restitution for surrender fees and sales charges incurred as a result of these recommendations.”
In settling this matter, Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC neither admitted nor denied the charges, but consented to the entry of FINRA’s findings. In addition, in August 2016, the firms took several steps to improve their supervision of switches involving variable annuities, including developing a switch alert to identify when the proceeds from a variable annuity liquidation are used to purchase an investment company product.
FINRA is a not-for-profit organization dedicated to investor protection and market integrity. It regulates one critical part of the securities industry—brokerage firms doing business with the public in the United States. FINRA, overseen by the SEC, writes rules, examines for and enforces compliance with FINRA rules and federal securities laws, registers broker-dealer personnel and offers them education and training, and informs the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers a dispute resolution forum for investors and brokerage firms and their registered employees. For more information, visit www.finra.org.