On September 2, 2020, the Financial Industry Regulatory Authority (FINRA) announced that two Wells Fargo subsidiaries had agreed to pay $1.4 million to more than 100 customers, in addition to fines of $675,000, for failing to properly supervise certain variable annuity switches. Pursuant to a Letter of Acceptance, Waiver and Consent (AWC), Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC (collectively, Wells Fargo) consented to the sanctions and findings of fact, without admitting or denying the allegations raised by FINRA Enforcement.

As alleged by FINRA, from January 2011 through August 2016, Wells Fargo failed to establish and maintain a reasonable supervisory system, including an alleged failure to enforce certain written supervisory procedures “that were reasonably designed to achieve compliance with FINRA’s suitability rule as it pertains to switches from variable annuities to investment company products.” Specifically, during the applicable time period, certain Wells Fargo brokers “recommended at least 101 potentially unsuitable switches involving the sale of a variable annuity to purchase investment company products” including mutual funds and unit investment trusts. In connection with these switches, impacted Wells Fargo customers incurred $1,445,167 in unnecessary surrender fees, in addition to upfront sales charges on various investment company products, while also earning less annual income following these switches.

According to the AWC, despite then-existing written procedures directing that supervisors review the suitability of such switches, Wells Fargo nevertheless “failed to ensure that such reviews happened.” Furthermore, no “switch alert” was generated by the supervisory system, and therefore no customary “switch letters” were sent to confirm the customers’ understandings of the transactions and related risks and expenses. These alleged systemic failures caused Wells Fargo to violate NASD Rule 3010 (for conduct before December 1, 2014) as well as FINRA Rules 3110 and 2010. As such, Wells Fargo Clearing Services, LLC was censured, fined in the amount of $625,000, and ordered to pay $1,355,499 plus interest in restitution. Similarly, Wells Fargo Advisors Financial Network, LLC was censured, fined in the amount of $50,000, and ordered to pay $89,668 plus interest in restitution.

Broker-dealers and by extension their affiliated stockbrokers have an affirmative duty under FINRA Rule 2111 (Suitability) (NASD Rule 2310) to perform adequate due diligence on an investment or securities transaction before making a recommendation to a customer. Investment recommendations must be suitable based on certain criteria including the customer’s financial needs and investment objectives. This analysis is particularly important when, as in this case involving variable annuities, surrender fees and subsequent sales charges for other investment products may be involved.

The Wells Fargo matter is also notable because, in recent years, FINRA Enforcement has prioritized possible sales practice abuses involving variable annuities. As we have previously reported, allegations of improper variable annuity switching can lead to disciplinary actions against brokers. In turn, the failure to have appropriate procedures in place to supervise brokers’ activities can cause broker-dealer firms to violate FINRA Rule 3110 (Supervision), which in turn will trigger a violation of FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade).

The attorneys at Giarrusso Law Group LLC have significant experience in working closely with investors to resolve all manner of disputes concerning investment losses, including losses suffered due to impermissible switching of variable annuities. Investors may pursue a claim to recover monies through securities arbitration before FINRA, or in some instances, through litigation. Investors who wish to discuss a possible claim are invited to contact us by telephone at (201) 771-1115 or by email at info@gialawgroup.com for a no-cost and confidential consultation.