Wells Fargo Copyright Justin Sullivan, Getty Images

Wells Fargo Fined for Improper Sales of Volatility ETPs

The firm’s independent broker/dealer and clearing arm must pay more than $3.4 million in restitution.

The Financial Industry Regulatory Authority says Wells Fargo Advisors Financial Network and Wells Fargo Clearing Services improperly sold volatility-linked exchange traded products as a long-term hedge on clients’ equity positions in the event of a market crash. The products, instead, are short-term trading vehicles that lose value over time and should not be used as a long-term buy-and-hold strategy.

The firm was ordered to pay $3.4 million in restitution to clients that were sold the unsuitable investments between July 1, 2010 and May 1, 2012.

The regulator also issued a Regulatory Notice, warning firms about sales of volatility ETPs, which are designed to track the Chicago Board Options Exchange Volatility Index futures, not the VIX itself.

Wells Fargo didn’t have a proper system in place for supervising the sales of volatility ETPs during the two-year period, but it corrected those failures in May 2012, FINRA said. The firm then cooperated with FINRA’s investigation, helping the regulator determine what was owed to clients affected.

“FINRA seeks restitution when customers have been harmed by a member firm’s misconduct,” said Susan Schroeder, executive vice president of FINRA’s Department of Enforcement, in a statement. “We also credit firms that proactively detect and correct issues prior to detection by FINRA, as Wells Fargo did in this matter.”

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