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FINRA, the regulator that oversees securities brokerages, ordered Wells Fargo on Monday to pay investors $3.4 million after its advisers recommended “unsuitable” investments known as volatility-linked products that were “highly likely to lose value over time.”
Wells Fargo pushed its investors into these investments, volatility-linked ETPs, as hedges, to protect against a market downturn. In fact, these investments are unsuitable for such a strategy. The investment are, in reality, “short-term trading products that degrade significantly over time,” regulators said, and “should not be used as part of a long-term buy-and-hold” strategy. The recommendation of such unsuitable investments is a form of negligence, and could be seen as reckless enough to be considered fraud.
Volatility-linked ETPs are complex products that most investors do not understand and, as such, they rely upon their adviser, who should be a trained professional, to understand. Certain Wells Fargo representatives mistakenly believed that the products could be used as a long-term hedge on their customers’ equity positions to help safeguard against a downturn in the market. In fact, volatility-linked ETPs are generally short-term trading products that degrade significantly over time and should not be used as part of a long-term buy-and-hold investment strategy.
FINRA issued Regulatory Notice 17-32 shortly after announcing the settlement with Wells Fargo to remind firms of their sales practice obligations relating to these products. Wells Fargo had previously been on notice to provide heightened supervision of complex products such as ETPs in Regulatory Notice 12-03, and were advised, along with all other brokerages, to assess the reasonableness of their own practices and supervision of these products.
FINRA found, “Wells Fargo failed to implement a reasonable system to supervise solicited sales of these products during the relevant time period.” The complete news release of the FINRA action can be found at the following link.