The group, part of Wells Fargo, has settled misconduct changes without admitting or denying the SEC's findings.

Wells Fargo Advisors, whose parent firm is reportedly examining an overhaul of wealth management business, has agreed to settle misconduct charges relating to how it sold certain investments to retail clients.

The Securities and Exchange Commission earlier this week said Wells Fargo Advisors LLC had agreed to settle charges of misconduct in the sale of market-linked investments, or MLIs.`  

Wells Fargo generated “large fees” by “improperly encouraging retail customers to actively trade the products, which were intended to be held to maturity”, the watchdog said. 

“It is important that brokers do their homework before they recommend that their retail customers buy or sell complex structured products,” Daniel Michael, Chief of the Enforcement Division’s Complex Financial Instruments Unit, said. “The products sold by Wells Fargo came with high fees and commissions, which Wells Fargo should have taken into account before advising retail customers to sell their investments and reinvest the proceeds in similar products,” he said.
   
Without admitting or denying the findings in the SEC’s order, Wells Fargo agreed to return $930,377 of “ill-gotten gains” plus $178,064 of interest and to pay a $4 million penalty.  Wells Fargo also agreed to a censure and to cease and desist from committing or causing any violations and any future violations of certain antifraud provisions of the federal securities laws.  The order recognizes that Wells Fargo took remedial steps to address the allegedly improper sales practices, the SEC said.

The trading strategy – which involved selling the MLIs before maturity and investing the proceeds in new MLIs – generated substantial fees for Wells Fargo, which reduced the customers’ investment returns. The SEC also found that Wells Fargo representatives involved did not “reasonably investigate or understand the significant costs of the recommendations”. The SEC found that Wells Fargo supervisors routinely approved these transactions despite internal policies prohibiting short-term trading or “flipping” of the products, it said. 

The affair adds to other compliance and misconduct issues at one of the largest US banks. In April this year, it agreed to pay $1 billion to settle claims with US authorities over deficiencies in its risk management. The authorities have been looking at its wealth management operation, having discovered that its sales staff had opened as many as 3.5 million accounts without clients' knowledge. Last week, this publication reported the bank as saying that “no final decision” had been reached on restructuring its wealth management arm. It is understood that Abbot Downing, the part of the bank handling ultra-high net worth clients, is not affected by any such changes if they occur.

The SEC’s investigation was conducted by Emily A Rothblatt, Michael D. Wells, and Ana D Petrovic, and supervised by Jeffrey A Shank. The SEC’s examination that led to the investigation was conducted by Jennifer L Spicher and Christopher L Caprio and supervised by John T Brodersen and Daniel Gregus.