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.