Securities Regulation Daily Wrap Up, TOP STORY—FINRA sanctions Wells Fargo brokers, issues reminders on sales of volatility-linked products, (Oct. 16, 2017)
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Monday, October 16, 2017

Securities Regulation Daily Wrap Up, TOP STORY—FINRA sanctions Wells Fargo brokers, issues reminders on sales of volatility-linked products, (Oct. 16, 2017)

By John Filar Atwood

Broker-dealers that work for Wells Fargo Clearing Services and Wells Fargo Advisors Financial Network must pay more than $3.4 million in restitution to customers to which they made unsuitable recommendations of volatility-linked products and certain supervisory failures. Wells Fargo agreed to settle without admitting or denying FINRA’s charges.

According to FINRA, between July 1, 2010, and May 1, 2012, certain Wells Fargo representatives recommended volatility-linked exchange-traded products (ETPs) without fully understanding their risks and features. The brokers mistakenly believed that the products could be used as a long-term hedge on their customers’ equity positions in the event of a market downturn, FINRA noted in a news release.

Degrade over time. FINRA advised that volatility-linked ETPs generally are short-term trading products that degrade significantly over time. They should not be used as part of a long-term buy-and-hold investment strategy, FINRA said.

FINRA found that Wells Fargo failed to implement a reasonable system to supervise solicited sales of the ETPs during the time period in question. Wells Fargo took remedial action to correct the supervisory deficiencies in May 2012 prior to detection by FINRA.

Wells Fargo also provided substantial assistance to FINRA by engaging a consulting firm to determine the appropriate restitution to be provided to affected customers. FINRA said that it took Wells Fargo’s corrective actions and cooperation into account when assessing the sanctions, and encouraged other firms to assess their own sales and supervision of volatility ETPs.

FINRA guidance. FINRA used the Wells Fargo action as an opportunity to issue a regulatory notice that reminds firms of their sales practice obligations relating to volatility-linked ETPs. Among the reminders are that recommendations to customers must be based on a full understanding of the terms, features and risks of the product recommended; sales materials must be fair and accurate; and firms must have reasonable supervisory procedures in place to ensure that these obligations are met.

Volatility-linked ETPs are designed to track Chicago Board Options Exchange Volatility Index (VIX) futures, rather than the VIX itself, FINRA noted. As a result, the products are highly likely to lose value over time, and are unsuitable for retail investors looking for typical buy-and-hold investments.

Companies: Wells Fargo Clearing Services, LLC; Wells Fargo Advisors Financial Network, LLC

MainStory: TopStory BrokerDealers FINRANews Enforcement

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