Wells Fargo to Pay $2M Over Variable Annuity Switches

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," FINRA claimed 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," FINRA alleged.

For example, one former Wells Fargo rep recommended that a client liquidate a variable annuity with a surrender value of $126,681—which caused that client to pay a surrender fee of $5,070 — and then use the proceeds to buy class A mutual funds with upfront sales charges totaling $5,531, according to FINRA.

In addition to causing that client to incur $10,601 in surrender fees and upfront sales charges, the recommended switch resulted in the client earning less annual income than she would have earned had she not sold the variable annuity, FINRA alleged.

"Firms must have a reasonable supervisory system in place to detect potentially unsuitable switches," Jessica Hopper, executive vice president and head of FINRA's Department of Enforcement, said in announcing the disciplinary action. "Wells Fargo failed to meet this standard," she said, adding: "We are pleased that customers will receive restitution for surrender fees and sales charges incurred as a result of these recommendations."

Additionally, 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 buy an investment company product, FINRA pointed out Wednesday.

Wells Fargo violated NASD Rule 3010 (for conduct before Dec. 1, 2014), FINRA Rule 3110 (for conduct on or after Dec. 1, 2014), and FINRA Rule 2010, FINRA claimed.

Separate Action

Wells Fargo also signed a FINRA AWC letter Thursday in which it agreed to pay a fine of $350,000 and restitution of $201,498 plus interest to clients for failing to reasonably supervise the activities of ex-reps Charles Frieda and Charles Lynch who, between November 2012 and October 2015, recommended that many of their clients invest a substantial portion of their assets at Wells Fargo in four high-risk energy securities. FINRA approved the letter Friday.

"The representatives' conduct generated multiple red flags regarding overconcentration in their customers' account that raised suitability concerns that Wells Fargo failed to reasonably investigate," according to FINRA.

As a result, the firm violated NASD Rule 3010(a) and FINRA Rules 3110(a) and 2010, FINRA said.

"Wells Fargo Advisors is committed to helping our clients achieve their investment goals, and we take our supervisory responsibilities seriously," Leordeanu told ThinkAdvisor on Wednesday. "The financial advisors involved in this matter are no longer with the firm and we are pleased to have this matter behind us as the conduct at issue occurred between 2012 and 2015."