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Jack Duval Quoted on Wells Fargo AWC over Complex Investments

Posted by Jack Duval

Aug 7, 2015 1:26:06 PM

 

Accelerant Managing Partner Jack Duval was quoted in a Thomson Reuters Regulatory Intelligence article.  The article can be found on the Thomson Reuters Risk website here.  (Behind a paywall.)  For thost without access, the entire article is copied below:

wells_fargo

 

Wells Fargo Fined Over Investment Product Too Complex for Brokers, Clients

Aug 05 2015 Richard Satran, Regulatory Intelligence

The sale of an investment that the U.S. securities industry regulator found too complicated for the amount of training and preparation on the part of Wells Fargo's sales team has generated a long tail of fees and legal costs for the broker dealer.

The Financial Industry Regulatory Authority said Tuesday it had reached an agreement with Wells Fargo on a censure and fine of $500,000 for the broker dealer's failure to educate and train brokers on the risk of the complicated floating-rate loan fund first sold in 2008 by the company's predecessor, Wachovia.

"This is one of those cases where complexity itself is the risk," said Jack Duval, managing partner of Accelerant, a securities litigation consulting firm. "The complexity comes back to bite everybody -- first at the client level and then at the broker level. Many investments have gone wrong because brokers misunderstood what they were selling." 

FINRA already has awarded restitution and assessed fines against Wells Fargo for the selling "unsuitable" investments in the case of the floating rate securities it calls STRATS, an acronym that stands for Structured Repackaged Asset-Backed Trust Securities.

Clients were sold on the STRATS for their safe, enhanced yield by brokers who were not made aware risks of the products, FINRA said in the action announced Tuesday. The STRATS were constructed from bonds whose fixed income interest payments were swapped for floating rate swap agreements. Far from simple, conservative securities, the STRATS were structured products loaded with fees for early termination and a capital security whose value fluctuated in the market.

The brokers "were generally not familiar" with the investments they were selling and the firm did not provide the training and supervision to sell them. In its investigation, FINRA reviewed internal marketing collateral and found that brokers would have "no reasonable basis for recommending the STRATS to retail customers."

The case shows how costly and time consuming a complicated financial offering can become. The broker has paid out some $10 million in fines and restitution for fund sales of only $12 million. While it pales compared with the $5.42 billion Wells reported for its quarterly profit last month the case generated untold legal costs over five years, along with reputational damage. Wells Fargo said it does not comment on FINRA cases.

In the latest action this week, Wells Fargo was still paying out for the complex investments that were initially packaged by Wachovia, a firm it acquired in a government supervised distress sale in 2008. In addition to the half-million dollars in new fines, the new agreement required new restitution of $241,974.34 in 2012 to pay customers for unexpected costs at the final redemption for those who held the securities issued six years ago. FINRA found that holders were not made aware of the risk that they would lose part of the principal on their investment on account of a termination fee.

"At the time of the STRATS termination many customers holding the STRATS received less and in some cases significantly less, than they paid for the STRATS." For Wells Fargo, the costs have also mounted for an ostensibly conservative trading instrument that kept on claiming time and money.

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Learn more about complex investment expert Jack Duval.

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Topics: Structured Products, Complex Investments, Compliance, Investment Complexity, Complex Investment Expert, Wells Fargo, FINRA Regulation, STRATS, AWC

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