The Financial Industry Regulatory Authority has ordered Wells Fargo Clearing Services to pay more than $3 million for failing to supervise a former registered rep as well as 40 other reps' unsuitable short-term trading of syndicate preferred stock, closed-end funds (CEFs) and medium-term notes (MTNs).
According to FINRA's order, from January 2017 to December 2018, WFCS failed to reasonably follow up on identified red flags of the former representative's short-term trading of these products.
During the same period, WFCS failed to establish and maintain a reasonable supervisory system to assess whether its reps recommended to retail customers short-term trades of syndicate preferred stocks and CEFs that were unsuitable, the order states.
"At least 40 of the firm's other representatives recommended that WFCS' retail customers purchase syndicate preferred stocks and CEFs and then sell the positions within 180 days, causing the customers to sustain losses on these transactions while the representatives collected concessions and commissions," according to FINRA's order.
During the relevant period, WFCS permitted representatives to recommend that customers purchase syndicate preferred stocks, CEFs and MTNs.
Income-Generating Securities
"These products are income-generating securities," FINRA states.
"They typically offer more consistent income payments than common stock, and in the case of preferred stocks and CEFs, higher payments than many bonds," according to the order. "Preferred stock, CEFs, and MTNs are generally purchased for their income features and held long-term. For each of the products at issue here, WFCS was a member of the selling syndicate."
Thus, when WFCS' customers purchased these products, "the issuer paid WFCS a sales concession (typically 2% for preferred stock, and between 1% and 2% for CEFs and MTNs), a portion of which WFCS shared with the representatives," FINRA said.
In addition, where customers later sold these securities, "WFCS typically, but not always, charged customers sales commissions, which WFCS also shared with the representatives," FINRA said.
