Wells to Pay $2.1 Million for Brokers’ Variable Annuity Switching
Wells Fargo has agreed to pay $2.1 million to settle allegations that it failed to supervise brokers in its private client group and its independent broker Financial Network channel who urged customers to sell variable annuities and use the proceeds to buy commission-generating mutual fund shares and unit investment trusts.
The Financial Industry Regulatory Authority said Wednesday that the two Wells units agreed to fines of $675,000 and restitution to around 100 customers of $1.4 million for failing to review “switch” recommendations.
Last week, Wells agreed to pay $550,000 to settle Finra claims that it failed to supervise two brokers who piled customers into speculative energy stocks.
In the annuities case, Wells from January 2011 to August 2016 failed to properly review at least 101 switches brokers engineered between the insurance investment products and mutual fund “A” shares and UITs, according to the acceptance, waive and consent letter Finra published. The switches caused some customers to pay early surrender charges plus upfront sales charges on their new investments, Finra said.
Wells Fargo supervisors failed to follow the firm’s written procedures for reviewing the suitability of switches and for automatically sending switch alert letters to clients informing them of the expenses and risks of the recommendations, Finra said.
Wells also did not obtain enough data from variable annuity issuers to perform switch suitability reviews, according to the consent letter.
In one instance, a broker recommended that a client liquidate a variable annuity with a $126,681 value that incurred a surrender fee of $5,070 and then purchase class A mutual funds with upfront sales charges of $5,531. The funds subsequently generated a lower rate of return than the annuity, Finra said.
“Firms must have a reasonable supervisory system in place to detect potentially unsuitable switches,” Jessica Hopper, head of FINRA’s department of enforcement, said in an announcement of the penalty. “Wells Fargo failed to meet this standard.
Wells spokeswoman Shea Leordeanu said in a statement the firm is pleased to resolve the matter and that it took steps in August 2016 to update its monitoring to “include additional oversight measures confirming investment suitability.”
“At Wells Fargo Advisors we take our supervisory responsibilities seriously,” Leordeanu wrote. “We are pleased to have this matter behind us as the conduct at issue occurred between January 2011 and August 2016.”