← Broker database 2024-09-12
FINRA Fines Wells Fargo Clearing Services for Failure to Supervise Unsuitable Short-Term Trading
According to FINRA, Wells Fargo Clearing Services, LLC (CRD #19616), based in St. Louis, Missouri, was censured, fined $400,000, ordered to pay $599,025.29 plus interest in restitution to customers, and ordered to pay disgorgement of $2,031,972.10 plus interest in concessions. The firm consented to these sanctions without admitting or denying the findings. FINRA found that Wells Fargo failed to reasonably supervise a registered representative who recommended unsuitable short-term trading of syndicate products to retail customers. The representative recommended purchases of syndicate preferred stock, closed-end funds (CEFs), and medium-term notes (MTNs), then recommended customers sell these positions at a loss after holding them for 180 days or less. Often, the representative would then recommend purchasing another syndicate product shortly after the sale, earning another sales concession. The firm's automatic surveillance system was not designed to detect liquidations occurring more than 90 days after purchase, allowing these transactions to go undetected. Even when the firm did flag the representative's short-term trades, it notified the representative but failed to follow up or address the red flags of unsuitable trading. The firm earned approximately $578,023 in selling concessions from syndicate purchases and approximately $282,564 in sales commissions from subsequent sales. Beyond this one representative, FINRA found that at least 40 other representatives recommended 1,504 syndicate preferred stock and CEF purchases that were later sold within 180 days at a realized loss. For these transactions, the firm earned approximately $1,453,948 in selling concessions and $316,460 in sales commissions. The firm's procedures did not define what constituted short-term trading or set forth an appropriate holding period, and trades held more than 90 days were not subject to any automated supervisory alert. Wells Fargo has since implemented an improved trade review system and enhanced supervisory procedures. Investors should be aware that short-term trading of syndicate products can generate significant costs and losses. When a financial advisor repeatedly recommends buying and quickly selling these products, it may benefit the advisor through commissions rather than serving the client's interests.