Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Friday, December 16, 2011

FINRA Fines Wells Fargo $2 Million for Unsuitable Sales of Reverse Convertible Securities

FINRA fined Wells Fargo Investments, LLC, $2 million for unsuitable sales of reverse convertible securities through one broker to 21 customers, and for failing to provide sales charge discounts on Unit Investment Trust (UIT) transactions to eligible customers. As part of the settlement, the firm is required to pay restitution to customers who did not receive UIT sales charge discounts and to provide restitution to certain customers found to have unsuitable reverse convertible transactions.

FINRA also filed a complaint against Alfred Chi Chen, the former Wells Fargo registered representative who recommended and sold the unsuitable reverse convertibles, and made unauthorized trades in several customer accounts, including accounts of deceased customers.

FINRA found that Chen recommended hundreds of unsuitable reverse convertible investments to 21 clients, most of whom were elderly and/or had limited investment experience and low risk tolerance. As of June 2008, Chen had 172 accounts that held reverse convertibles, with 148 of those accounts having concentrations greater than 50 percent of their total account holdings, and 46 having concentrations greater than 90 percent. Fifteen of the 21 customers were over 80 years old. The reverse convertible transactions exposed these customers to risk inconsistent with their investment profiles, and resulted in overly concentrated reverse convertible positions in their accounts.

FINRA also found that Wells Fargo failed to provide certain eligible customers with breakpoint and rollover and exchange discounts in their sales of UITs because the firm had insufficient systems and procedures to monitor for unsuitable reverse convertible sales and to ensure that UIT customers received discounts for which they were entitled.

In concluding these settlements, Wells Fargo neither admitted nor denied the charges, but consented to the entry of FINRA's findings

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