Wells Fargo Settles with SEC Over Charges Related to Single Inverse EFT Investments
The U.S. Securities and Exchange Commission announced on February 27, 2020, that it had settled charges it lodged against Wells Fargo Clearing Services and Wells Fargo Advisors Financial Network related to single inverse exchange-traded fund (EFT) investments. The charges specifically relate to Wells Fargo’s failure to adopt written compliance policies and procedures which would have prevented unsuitable recommendations of single EFTs to clients and to reasonably supervise its financial professionals to prevent unsuitable single inverse EFT recommendations. 1
Inverse EFTs are constructed by using various derivatives to profit from a decline in the value of an underlying benchmark.2
EFTs are a type of fund that moves in the opposite direction of an index that it tracks and, as such, inverse EFTs can be used to hedge other positions or bet on a falling market.3 For years, the SEC has warned investment companies that because of their complexity EFTs and inverse EFTs are not easily understood and thus are not a good investment for most retail investors.
In fact, the SEC charged that Wells Fargo did not do an adequate job in training the company’s advisors on this investment option. Because their advisors didn’t understand the product or the risk of loss posed, they made unsuitable recommendations to clients to buy and hold single-inverse EFTs for month or years. In fact, EFTs are not long-term investments since the derivative contracts are bought and sold daily by the fund’s manager.4
To compound matters, many of the retail investors that Wells Fargo advisors recommended these risky single-inverse EFTs to were retirees with limited income and net worth who had conservative or moderate risk tolerances. The SEC charged that from April 2012 through September 2019, Wells Fargo did not have in place policies and procedures designed to prevent and detect these unsuitable single-inverse EFT recommendations.
In settling the charges in this matter, Wells Fargo did not admit or deny the SEC findings. They agreed to pay a penalty of $35 million, with the penalty being allocated among those clients who heeded the Wells Fargo advisor’s recommendation to buy single-inverse EFTs and who suffered losses after holding the positions for longer time periods. As part of the order, Wells Fargo will cease and desist from committing or causing any future violations of the relevant provisions.5
This EFT settlement comes just six days after Wells Fargo settled with the SEC and the U.S. Justice Department over allegations that from 2002 to 2016 Wells Fargo employees created millions of unauthorized or fraudulent accounts in order to meet corporate sales goals. In settling those charges Wells Fargo agreed to pay $3 billion, which includes $500 million that will be returned to investors.6
If you feel that you may have been a victim of securities fraud, or broker negligence please contact our Securities Law Offices serving the Greater Detroit Area and beyond. We offer consultations and are happy to talk to you about your unique case today!
Any information on our website is for general information purposes only.
1,5 Press Release: SEC Charges Wells Fargo in Connection with Investment Recommendation Practices, www.sec.gov, 2/27/2020
2,4 Inverse EFT, www.investopedia.com, by James Chen, 8/26/2019
3 Wells Fargo to Pay $35 Million to Settle EFT Probe, The Wall Street Journal, by Dave Michaels, 2/27/2020
6 Wells Fargo to Pay $3B Settlement for Violating Antifraud Rules, Resolving Fake Account Probes, USA Today, by Paul Davidson and Jessica Menton, 2/21/2020