Between November 2012 and October 2015, Lynch and another Wells Fargo representative recommended an investment strategy to more than 50 customers, which was a majority of their customers, causing the customers accounts to become significantly over-concentrated in a single sector of the overall market. The over-concentration primarily involved four speculative equity securities within the energy sector. Due to the speculative nature of the recommended securities, the volatility of the energy market, and the high level of concentration, this strategy exposed customers to significant potential losses. In general, based on those recommendations, most of these customers were concentrated in energy-sector investments, with the majority of those investments concentrated in the four speculative energy securities.
During the relevant period, in many instances, Lynch failed to properly consider and failed to obtain accurate customer investment profile information to determine the suitability of his over-concentration strategy and the securities he recommended as part of that strategy. In this regard, Lynch recommended the strategy to customers without proper consideration of each customer's individual investment experience, risk tolerance, investment time horizon, net worth, liquidity needs, and income. Consequently, Lynch did not properly assess the significant potential risks associated with his recommended strategy for each of these customers. In certain instances, the potential risks were compounded because the over-concentration in speculative energy-sector securities exceeded 50% of the customer's net worth (exclusive of personal residence).
In 2015, when the energy market began a downturn, Lynch unsuitably recommended that certain of his over-concentrated customers adhere to his strategy without regard to their particular situations or ability to continue to sustain losses. By following Lynch's recommendation, the customers suffered millions of dollars in aggregate losses.
Between November 2012 and October 2015, Frieda and another Wells Fargo representative recommended an investment strategy to more than 50 customers, which was a majority of their customers, causing the customers accounts to become significantly over-concentrated in a single sector of the overall market. The over-concentration primarily involved four speculative equity securities within the energy sector. Due to the speculative nature of the recommended securities, the volatility of the energy market, and the high level of concentration, this strategy exposed customers to significant potential losses. In general, based on those recommendations, most of these customers were concentrated in energy-sector investments, with the majority of those investments concentrated in the four speculative energy securities.During the relevant period, in many instances, Frieda failed to properly consider and failed to obtain accurate customer investment profile information to determine the suitability of his over-concentration strategy and the securities he recommended as part of that strategy. In this regard, Frieda recommended the strategy to customers without proper consideration of each customer's individual investment experience, risk tolerance, investment time horizon, net worth, liquidity needs, and income. Consequently, Frieda did not properly assess the significant potential risks associated with his recommended strategy for each of these customers. In certain instances, the potential risks were compounded because the over-concentration in speculative energy-sector securities exceeded 50% of the customer's net worth (exclusive of personal residence).In 2015, when the energy market began a downturn, Frieda unsuitably recommended that certain of his over-concentrated customers adhere to his strategy without regard to their particular situations or ability to continue to sustain losses. By following Frieda's recommendation, the customers suffered millions of dollars in aggregate losses.
Wells Fargo Advisors, LLC was a FINRA member from 1987 until November 2016, when it merged with another broker-dealer and became Wells Fargo Clearing Services, LLC, a FINRA member. Headquartered in St. Louis, Missouri, the firm engages in a general securities business. As of June 2020, the firm has approximately 25,807 registered individuals and 6,216 branch offices.
RELEVANT DISCIPLINARY HISTORYRespondent does not have any relevant disciplinary history with the Securities and Exchange Commission, any state securities regulators, FINRA, or any other self-regulatory organization.
Between November 2012 and October 2015, Frieda and Lynch recommended that many of their customers invest a substantial portion of their assets at Wells Fargo in the four high-risk energy securities, including one low-priced security. For example, the representatives' recommendations resulted in a 38-year-old customer holding 92.4% of her total household account value in these four securities and a 54-year-old customer holding 55.7% of her total household account value in these securities. The two representatives sold approximately $46 million of these securities to their customers, representing about half of their overall sales.Frieda and Lynch exacerbated risk of investing in these securities by recommending that customers purchase shares of other energy securities. In many instances, their customers' investments in energy-sector securities exceeded 50% of their liquid net worth.Because of Frieda and Lynch's recommendations, 70 of their customers lost a total of more than $10 million when prices of energy securities prices plummeted in 2014 and 2015.
[B]etween September 2013 and April 2014, the firm's trade-review system issued 28 alerts that four customers of the representatives were concentrated in the same low-priced, energy security. The alerts noted concentration levels ranging between 35.18% and 86.95% for these accounts, which was above the firm's threshold for triggering a security concentration alert.
[S]pecifically, the WSPs required reviewers to: (1) look for any trends of concentration issues in other accounts serviced by the account's representative; (2) review the representative's suitability determination, which the WSPs say the representative "should document"; and (3) consider client contact. But the firm did not review the representatives' other customer accounts for concentration trends, and in certain instances, did not consider contacting customers despite the number of alerts or concerns about whether the customers were aware of the risks associated with concentration. Rather, it resolved alerts based on the representatives' uncorroborated assurances that their customers were aware of the concentrations in their accounts.
In addition, the firm was aware that Frieda and Lynch had not documented the concentration-suitability determination for certain customers, as the firm's WSPs required, raising a concern regarding the underlying suitability of their recommendations.The firm knew, but did not investigate, that Frieda and Lynch were moving energy securities from customers' advisory accounts into brokerage accounts to avoid the firm's concentration limits in advisory accounts. This attempt to circumvent the firm's own limits was a red flag that the representatives might be unsuitably overconcentrating customer accounts in energy securities.The firm's WSPs required a daily blotter review to detect "unusual trading activity or patterns" and "[c]oncentration." The trade blotters for Frieda and Lynch consistently evidenced that they were effecting a high volume of sales of the four high-risk energy securities in certain of their customers' accounts. Yet the firm failed to follow-up on this red flag concerning the representatives' trading.
Regulatory Event: 163Civil Event: 2Arbitration: 295
https://www.finra.org/media-center/news-releases/2011/finra-fines-wells-fargo-2-million-unsuitable-sales-reverse-convertibleshttps://www.finra.org/media-center/news-releases/2014/finra-fines-wells-fargo-advisorswells-fargo-advisors-financial-networkFINRA Orders Wells Fargo Broker-Dealers to Pay $3.4 Million in Restitution and Reminds Firms of Sales Practice Obligations for Volatility-Linked Products (FINRA Press Release / October 16, 2017)https://www.finra.org/media-center/news-releases/2017/finra-orders-wells-fargo-broker-dealers-pay-34-million-restitution-andWells Fargo Advisors Settles SEC Charges for Improper Sales of Complex Financial Products / Misconduct Imposed Substantial Costs on Retail Customers (SEC Release / June 25, 2018)https://www.sec.gov/news/press-release/2018-112SEC Charges Wells Fargo In Connection With Investment Recommendation Practices (SEC Release / February 27, 2020)https://www.sec.gov/news/press-release/2020-43#:~:text=The%20SEC%20ordered%20Wells%20Fargo,be%20distributed%20to%20harmed%20investors.
FINRA Sanctions Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC More Than $2 Million for Supervisory Violations Related to Variable Annuity Switches / Firms to Pay $1.4 Million in Restitution to Approximately 100 Affected Customers (FINRA Press Release / September 2, 2020) (the "September 2, 2020 FINRA Wells Fargo AWC"_https://www.finra.org/media-center/newsreleases/2020/finra-sanctions-wells-fargo-clearing-services-llc-and-wells-fargo
[FINRA] found that from January 2011 through August 2016 Wells Fargo failed to supervise the suitability of recommendations that customers sell a variable annuity and use the proceeds to purchase one or more investment company products, such as mutual funds or unit investment trusts. In spite of directives in the firms' supervisory procedures that supervisors review the suitability of any product switch by considering the comparative costs and benefits associated with the new and existing products, the firms did not obtain from variable annuity issuers data sufficient to review the suitability of variable annuity surrenders and subsequent switches, including surrender fees. Wells Fargo's procedures also required the firms to send switch letters to clients, which would have confirmed customers' understanding of the transaction, as well as related risks and expenses. 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," 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. For example, one former representative recommended that a customer liquidate a variable annuity with a surrender value of $126,681-which caused the customer to pay a surrender fee of $5,070-and then use the proceeds to purchase class A mutual funds with upfront sales charges totaling $5,531. In addition to causing the customer to incur $10,601 in surrender fees and upfront sales charges, the recommended switch resulted in the customer earning less annual income than she would have earned had she not sold the variable annuity.Jessica Hopper, Executive Vice President and Head of FINRA's Department of Enforcement, said, "Firms must have a reasonable supervisory system in place to detect potentially unsuitable switches. Wells Fargo failed to meet this standard. We are pleased that customers will receive restitution for surrender fees and sales charges incurred as a result of these recommendations." . . .
On August 28, 2009, Wachovia Securities, LLC-which Wells Fargo Advisors, LLC had acquired in December 2008-executed an AWC through which it consented to findings that it violated NASD Rules 2110 and 3010 due to "supervisory failures regarding variable annuity sales" and having "had an inadequate system in place that would detect undisclosed switches."1 The AWC required the firm to pay a fine of $350,000.
From January 2011 through August 2016 (the "Relevant Period"), Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC (together "Wells Fargo" or the "Firm") failed to establish and maintain a supervisory system, and failed to enforce written supervisory procedures ("WSPs"), that were reasonably designed to achieve compliance with FINRA's suitability rule as it pertains to switches from variable annuities to investment company products. Based on the foregoing, Wells Fargo violated NASD Rule 3010 (for conduct before December 1, 2014), FINRA Rule 3110 (for conduct on or after December 1, 2014), and FINRA Rule 2010.
In the Matter of Harry Seth Datys, Respondent (FINRA AWC 2017054381601 / September 8, 2020)https://www.finra.org/sites/default/files/fda_documents/2017054381601%20Harry%20Seth%20Datys%20CRD%201877750%20AWC%20va.pdfFor the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Harry Seth Datys submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Harry Seth Datys was first registered in 1990 and by 2005, he was registered with FINRA member firm WestPark Capital, Inc.In accordance with the terms of the AWC, FINRA found that Datys had violated NASD Rule 2310, and FINRA Rules 2111 and 2010; and the self regulator imposed upon Datys a $20,000 fine and a 15-month suspension with any FINRA member in any capacity. The AWC alleges that Sylvester Knox has the following "Relevant Disciplinary History":In 2008, the New Jersey Bureau of Securities (NJ Bureau) issued a Summary Revocation Order and Assessment of Monetary Penalties revoking Datys' agent registration and assessing civil monetary penalties against Datys in the amount of $6,000 for failing to comply with a heightened supervisory agreement with the firm. In 2006, the NJ Bureau had conditioned Datys' registration upon his entering into this agreement with the firm. The NJ Bureau found that Datys failed to comply with the agreement by failing to disclose four items to the NJ Bureau: (1) an action impacting Datys' registration in Colorado; (2) a New Jersey customer complaint; (3) a Texas civil litigation suit; and (4) a supervisory change.In 2014, the NJ Bureau assessed a civil monetary penalty for Datys in the amount of $15,000, as set forth in a Consent Order, after finding that Datys continued to actively transact business for up to four New Jersey residents between May 2008 and August 2012 and caused certain clients to change their principal address from their New Jersey residential addresses to their New York business addresses, despite the fact that the clients were still residing at the New Jersey addresses, after his registration in New Jersey had been revoked.Under the heading "Overview," the AWC alleges that:From 2012 to 2016, in connection with two securities offerings, Datys offered and sold 24 promissory notes issued by WestPark Capital Inc.'s parent company, WestPark Capital Financial Services LLC, to 14 customers, raising a total of $2,713,200. Datys violated NASD Rule 2310 and FINRA Rules 2111 and 2010 by failing to have a reasonable basis to recommend these notes to customers. In addition, Datys made negligent misrepresentations and omissions in connection with the sale of the offerings, in violation of FINRA Rule 2010 and in contravention of Section 17(a)(2) and (3) of the Securities Act of 1933.
FINRA's Foolish Inconsistency (BrokeAndBroker.com Blog / June 9, 2017)http://www.brokeandbroker.com/3495/finra-history-consistency/
FINRA Says Impeccable Merrill Lynch Has No Relevant Disciplinary History (BrokeAndBroker.com Blog / May 19, 2020)
http://www.brokeandbroker.com/5220/finra-relevant-disciplinary-history/In the Matter of TD Ameritrade, Inc., Respondent (Securities Industry Commentator / January 7, 2020)http://www.rrbdlaw.com/4997/securities-industry-commentator/#finraAll Voya FINRA AWCs Are Not Relevant Except When They Are (BrokeAndBroker.com Blog / April 24, 2019)http://www.brokeandbroker.com/4553/finra-awc-voya/FINRA Disciplinary Settlement Raises Relevancy Of Any (BrokeAndBroker.com Blog / July 10, 2017)http://www.brokeandbroker.com/3522/finra-awc-statutory-disqualification/
70 customers70 customers lost over $10 million70 customer lost over $10 million in 2014 or, at the latest, 2015.