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WASHINGTON — Wells Fargo & Co. agreed to pay $35 million to settle regulatory claims that its financial advisers recommended exchange-traded funds that were too risky for some clients.
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The Securities and Exchange Commission’s investigation targeted Wells Fargo‘s sale of inverse ETFs, a type of fund that moves in the opposite direction of an index it tracks. Inverse ETFs can be used to hedge other positions or bet on a falling market, but the products are complex enough that regulators have warned for years they are unsuitable for many individual investors.
The sanction follows on an earlier blemish for similar conduct in 2012, when Wells Fargo paid $2.7 million to the brokerage industry’s self-regulator for selling inverse and leveraged ETFs without reasonable supervision. The SEC’s settlement order said Wells Fargo updated its policies for selling the products in 2012, but the controls still weren’t sufficient.
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The deal comes one week after Wells Fargo resolved a bigger regulatory cloud, a multiyear investigation into how low-level employees who were stressed by high sales goals opened fake and unauthorized bank accounts. Wells Fargo paid $3 billion to settle those allegations.
Brokers and investment advisers have struggled for years with how to sell inverse and leveraged ETFs. Leveraged ETFs employ derivatives to deliver two or three times the daily price moves of benchmarks. The SEC approved the products over a decade ago and has been reining in their use by individual investors ever since.
Wells Fargo said Thursday that its advisory business “no longer sells these products in the full-service brokerage.”
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The products are popular with some traders and are intended for daily, tactical trading. But many brokers have recommended the products to investors who held the funds for longer periods, which can lead to surprises.
For example, an inverse fund that should rise in value when the market declines can actually lose value during periods of sustained volatility. That outcome stems from the effects of daily compounding, which over longer periods produces returns that can vary from a leveraged or inverse ETF’s objectives.
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The SEC’s settlement order said Wells Fargo’s employees advised clients from 2012 to 2019 to hold the funds “in many cases for months or years” in accounts, including those investors saving for retirement.
The SEC said the $35 million penalty would be used to compensate clients who had losses and held the funds for more than 30 days.
The order said some of Wells Fargo’s employees weren’t familiar with the company’s policies for selling inverse ETFs, or didn’t understand how the funds worked.
