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FINRA Sanctions Wells Fargo Clearing Services Nearly $3 Million for Short-Term Trading Abuses

By Mari Nicholson

FINRA Sanctions Wells Fargo Clearing Services Nearly 3 Million for Short Term Trading Abuses

The Financial Industry Regulatory Authority has again taken action against Wells Fargo Clearing Services, LLC, or WFCS, the clearing subsidiary of banking giant Wells Fargo, for failing to reasonably supervise a former registered representative who recommended unsuitable, short-term trading of syndicate preferred stock, closed-end funds, and medium-term notes to retail customers.

In addition to a censure, FINRA fined the company $400,000, along with restitution of nearly $600,000 and disgorgement of more than $2 million, plus interest.

FINRA reported that from January 2017 to December 2018, WFCS allowed representatives to recommend syndicated preferred stock, closed-end funds, and medium-term notes. These products are typically designed to generate income and are intended to be held long term. However, FINRA stated that at least 40 WFCS representatives, including one who has since been barred by FINRA, recommended that clients purchase these products and then sell them within 180 days, often resulting in losses for the clients.

Each time a WFCS customer purchased a product, the issuer paid the company a sales concession. The short-term trading strategy allowed the representatives to collect sales concessions and commissions on both the purchases and sales of these securities. The practice is particularly concerning because it prioritizes the representatives’ financial gain over the clients’ best interests.

FINRA found that WFCS failed to reasonably supervise its representatives’ activities and did not adequately follow up on red flags that indicated potential misconduct. The firm’s electronic surveillance system was designed to identify short-term trading only within 90 days of purchase, leaving a significant gap in oversight. Even when the system did flag suspicious activity, WFCS’s response was often limited to notifying the representative of the questionable nature of the trades without taking further action.

These oversights violated Rule 3110, which requires the maintenance of a system to supervise the activities of the company’s associates, and Rule 2010 which requires “high standards of commercial honor.”

WFCS has stated that it has implemented an improved trade review system and enhanced supervisory procedures to prevent future misconduct, but this is not the first time that the company has faced regulatory action for supervisory failures.

In December 2021, WFCS was censured and ordered to pay restitution of nearly $3.37 million plus interest for supervisory failures related to 529 plans. During that same time period, it was censured and ordered to pay a fine of $550,000 and restitution of just over $2 million plus interest for failing to establish and maintain a supervisory system related to early rollovers of Unit Investment Trusts. In September 2020, it was censured, ordered to pay a fine of $625,000 and restitution of nearly $1.36 million plus interest for violations related to variable annuities, and, as previously reported by The DI Wire, WFCS was censured and ordered to pay, together with an affiliate, a civil penalty of $35 million for overcharging investment accounts.

WFCS is headquartered in St. Louis and engages in a general securities business, among others. WFCS has approximately 19,000 registered representatives working in approximately 5,000 branches.

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