Wells Fargo and Banc of America were ordered by the Financial Industry Regulatory Authority (FINRA) to pay fines totaling $2.15 million, as well as pay more than $3 million in restitution to customers for losses tied to unsuitable sales of floating-rate bank loan funds.
FINRA ordered Wells Fargo Advisors, LLC, the successor for Wells Fargo Investments, LLC, to pay a $1.25 million fine and to reimburse approximately $2 million in losses to 239 customers. The regulator ordered Merrill Lynch, Pierce, Fenner & Smith Inc., as the successor for Banc of America Investment Services, Inc., to pay a $900,000 fine and reimburse approximately $1.1 million in losses to 214 customers.
Floating-rate bank loan funds are mutual funds that generally invest in a portfolio of secured senior loans made to entities whose credit quality is rated below investment-grade. The funds are subject to significant credit risks and can also be illiquid.
FINRA found that Wells Fargo and Banc of America brokers recommended concentrated purchases of floating-rate bank loan funds to customers whose risk tolerance, investment objectives, and financial conditions were inconsistent with the risks and features of floating-rate loan funds. Specifically, the customers wanted to preserve principal and had conservative risk tolerances, yet brokers made recommendations to purchase floating-rate loan funds without having reasonable grounds to believe that the purchases were suitable for those customers.
FINRA also says that the firms in question failed to train their sales forces regarding the unique risks and characteristics of the funds, as well as failed to reasonably supervise the sales of the products.
“As investors continue to look for yield in a low-interest-rate environment, these actions should serve as a reminder that brokers and their firms need to ensure that investment recommendations are consistent with customers’ investment objectives and risk tolerances,” said Brad Bennett, FINRA’s Vice President and Chief of Enforcement, in announcing the settlement.
“Wells Fargo and Banc of America allowed their brokers to sell floating-rate bank loan funds to investors for whom the positions were unsuitable, resulting in significant losses to many customers,” he added.
As is the case in most FINRA settlements, Wells Fargo and Banc of America neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.