The SEC has taken action against Wells Fargo Clearing Services LLC and Wells Fargo Advisors Financial Network LLC (collectively referred to as Wells Fargo). The SEC has charged Wells Fargo for the excessive charging of over 10,900 investment advisory accounts, resulting in more than $26.8 million in undue advisory fees. As part of the resolution, Wells Fargo has agreed to pay a civil penalty of $35 million to settle the charges.
Background and Allegations
The SEC’s order reveals that certain financial advisers associated with Wells Fargo and its precursor entities reached agreements to lower the standard advisory fees for specific clients. These fee reductions were documented through handwritten or typed modifications on the investment advisory agreements when these clients opened their accounts. However, the problem arose when the employees responsible for account processing at Wells Fargo and its predecessor firms failed to input these revised advisory fee rates into the firms’ billing systems while setting up the clients’ accounts.
Failure to Implement Adequate Compliance Policies
Moreover, the issue was compounded by Wells Fargo’s failure to establish and enforce comprehensive compliance policies and procedures. These measures were expected to ascertain the accuracy of data within the billing systems and prevent the overcharging of clients inherited from the predecessor firms, as well as new clients introduced by Wells Fargo itself. Consequently, a number of clients who initiated their accounts before 2014 were subjected to excessive advisory fees, extending until the conclusion of December 2022.
Enforcement and Client Protection
Gurbir S. Grewal, Director of the SEC’s Enforcement Division, emphasized the gravity of the situation, stating, “For years, Wells Fargo and its predecessor firms negotiated reduced advisory fees with thousands of clients, but failed to honor them, overcharging those clients millions of dollars as a result. Today’s enforcement action underscores the need for firms growing their businesses through acquisition to ensure that their growth does not come at the expense of client protection.”
Restitution and Resolution
In response to the situation, Wells Fargo has taken measures to rectify the situation. The bank has disbursed approximately $40 million, including interest, to the affected account holders as compensation for the overcharges. It’s important to note that Wells Fargo undertakes this action without acknowledging or denying the SEC’s charges. In conjunction with the $35 million civil penalty, Wells Fargo has agreed to the terms outlined in the Commission’s order, which states that the firm violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 as well as Rule 206(4)-7. Wells Fargo has also consented to a cease-and-desist order and censure.
The SEC’s enforcement action against Wells Fargo serves as a eminder for financial institutions to prioritize their commitments to clients and uphold the terms of their agreements. It highlights the critical role of compliance policies in safeguarding clients’ interests, particularly when firms expand through acquisitions. As the industry evolves, it’s essential for investment advisers to continuously adopt and implement policies that ensure the well-being of all their clients, including those carried over from predecessor firms.
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