The US Financial Regulator has induced Wells Fargo Advisors Financial Network, along with its sister-company, Wells Fargo Clearing Services, to pay more than $1.4 million in restitution, plus interest, to approximately 100 customers and also to pay $675,000 in fines for failing to 'supervise recommendations' that customers should switch from variable annuities to investment company products.
According to FINRA, between January 2011 and August 2016 Wells Fargo failed to "supervise the suitability of recommendations that customers sell a variable annuity and use the proceeds to purchase one or more investment company products, such as mutual funds or unit investment trusts."
In spite of directives in the firms’ supervisory procedures that supervisors review the suitability of any product switch by considering the comparative costs and benefits associated with the new and existing products, the firms did not ask variable annuity issuers for enough data to review the suitability of variable annuity surrenders and subsequent switches, including surrender fees. Wells Fargo’s procedures also required the firms to send 'switch letters' to clients, which would have confirmed customers’ understanding of the transaction, as well as related risks and expenses. Although the procedures required that such letters should be sent “automatically ... based on alerts generated by [the firms’] supervisory system[s], unless withheld by the qualified supervisor,” the firms did not, in fact, have a switch alert to identify switches from variable annuities to investment company products during the relevant period and the firms did not send 'switch letters' to affected customers.
As a result, between January 2011 and August 2016, Wells Fargo’s representatives recommended at least 101 potentially unsuitable switches that required customers to incur both surrender fees and substantial new sales charges. For example, one former representative told a customer that he ought to liquidate a variable annuity with a surrender value of $126,681 — which caused the customer to pay a surrender fee of $5,070 — and then use the proceeds to purchase class A mutual funds with upfront sales charges to the value of $5,531. In addition to causing the customer to incur $10,601 in surrender fees and upfront sales charges, the recommended switch resulted in the customer earning less annual income than she would have earned had she not sold the variable annuity.
The two firms have neither admitted to nor denied the charges.