Wells Fargo Sanctioned by FINRA for Not Supervising Variable Annuity Transaction Switches to Other Company Products

In February, Wells Fargo settled a civil lawsuit and criminal prosecution filed ty the U.S. Department of Justice stemming from the 2016 disclosure that employees at the fourth largest bank in the nation had opened millions of fraudulent saving and checking accounts.1

Wells Fargo agreed to pay $3 billion in the settlement.

Then, on September 2, the Financial Industry Regulatory Authority (FINRA) announced a settlement in another alleged breach of Wells Fargo’s responsibility to adequately supervise employees. In that breach, Wells Fargo agreed to a $2.1 million fine to settle allegations that it failed to supervise brokers in relation to variable annuity transactions involving switches to one or more investment company products including commission-generating mutual fund shares and unit investment trusts (UITs). In this settlement Wells Fargo neither accepted nor denied FINRA’s charges.


Investment firms are required to have a supervisory system in place to detect possible unsuitable switches. “Wells Fargo failed to meet this standard,” said Jessica Hopper, head of FINRA’s Department of Enforcement.2 FINRA alleged that for five years, between January 2011 and August 2016, Wells Fargo Clearing Services, LLC, and Wells Fargo Advisors Financial Network, LLC, “failed to supervise recommendations that customers switch from variable annuities to investment company products.” 3 The allegations involved approximately 100 customers who will receive restitution and interest from Wells Fargo totaling more than $1.4 million. Wells Fargo will also pay FINRA fines totaling $675,000.

Wells Fargo did have a directive in the firms’ supervisory procedures that required supervisors to review the suitability of product switches by comparing costs and benefits associated with the new and existing products. Despite having that directive, supervisors did not obtain the necessary data, including surrender fees, to make the required comparisons.


Wells Fargo also had procedures which required that letters be sent to the clients affected by switches. These required letters would have confirmed that customers understood the transactions. The letters would have also provided information on related risks and expenses. No letters were sent out even though Wells Fargo procedures stipulated that these letters were supposed to be sent out automatically based on alerts generated by Wells Fargo’s supervisory system. According to FINRA, during the period noted Wells Fargo did not have a switch alert to identify switches from variable annuities to investment company products.

FINRA noted that just after the period in question, around August 2016, Wells Fargo did improve their supervision of switches involving variable annuities. These improvements instituted by Wells Fargo included “developing a switch alert to identify when the proceeds from a variable annuity liquidation are used to purchase an investment company product.”4 In a statement, a Wells Fargo spokesperson, Shea Leordeanu said, “At Wells Fargo Advisors we take our supervisory responsibilities seriously. We are pleased to have this matter behind us as the conduct at issue occurred between January 2011 and August 2016.”5 #####

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1 Wells Fargo to Pay $3 Billion Over Fake Account Scandal, by Pete Williams, February 21, 2020
Link: https://www.nbcnews.com/news/all/wells-fargo-pay-3-billion-over-fake-account-scandal-n1140541

2,3,4 FINRA Sanctions Wells Fargo Clearing Services LLC and Wells Fargo Advisors Financial Network, LLC More Than $2 Million for Supervisory Violations Related to Variable Annuity Switches by Michelle Ong, September 2, 2020
Link: https://www.finra.org/media-center/newsreleases/2020/finra-sanctions-wells-fargo-clearing-services-llc-and-wells-fargo

5 Wells to Pay $2.1 Million for Brokers’ Variable Annuity Switching by Mason Braswell, 9/2/2020
Link: https://advisorhub.com/wells-to-pay-2-1-million-for-brokers-variable-annuity-switching/