The Financial Industry Regulatory Authority (FINRA) levied a $2 million
fine against Wells Fargo Investments, LLC for the
unsuitable sale of reverse convertible securities to 21 customers by Alfred Chi Chen,
a former Wells Fargo registered representative, and for failure to provide
sales charge discounts on Unit Investment Trust (UIT) transactions to
eligible customers. Restitution was ordered as well.
"Wells Fargo failed to review reverse convertible transactions to
ensure they were suitable," said Brad Bennett, FINRA Executive Vice
President and Chief of Enforcement. "[Wells Fargo] also did not provide
sales charge discounts to eligible customers purchasing unit investment
trusts, [these were] both serious failings that harmed investors."
According to a FINRA investigation, Alfred Chi Chen recommended hundreds
of unsuitable reverse convertible securities to 21 mostly elderly clients.
More than a quarter of the accounts with reverse convertible holdings
had 90 percent of their assets in the risky securities. (FINRA also filed
a complaint against Chen, which accuses him of making
unauthorized trades in customer accounts, including several customers who were deceased.)
"The reverse convertible transactions exposed these customers to risk
inconsistent with their investment profiles, and resulted in overly concentrated
reverse convertible positions in their accounts,"
wrote FINRA in a Dec. 15 press release.
FINRA’s investigation also found that Wells Fargo’s systems
and procedures were "insufficient" to adequately monitor the
sale and recommendation of reverse convertible sales and to ensure proper
receipt of UIT discounts for eligible customers. Wells Fargo neither admitted
nor denied FINRA’s allegations. The firm did, however, consent to
the entry of the findings.