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FINRA Orders Wells Fargo to Pay $3.4 Million in Connection with Sales Practice Violations for Volatility Linked Products

On October 16, 2017, The Financial Industry National Regulatory Authority (“FINRA”) announced a $3.4 million dollar fine against Wells Fargo, in connection to Wells Fargo brokers improperly placing retail clients in volatility linked products. Many of these volatility linked exchange-traded products (“ETPs”) such as the VXX, XIV, TVIX, and other variations of volatility indexes, that attempt to match, inverse, or leverage Chicago Board of Exchange volatility metrics, are highly complex products that are not suitable for all investors.  FINRA found in its investigation that Wells Fargo registered representatives recommended these ETPs to customers without fully understanding the risks they entail.

ETPs are uniquely volatile products that degrade in value significantly over time and are designed primarily for short term holds when part of a comprehensive hedging strategy or in anticipation of a binary event or large market move. ETPs are not designed to be bought and held in customer accounts for any significant time period, which is a practice Wells Fargo registered representatives were recommending to their customers. As a reminder to financial industry professionals of the obligations they have to customers when recommending volatility ETPs, FINRA released a new Regulatory Notice 17-32 reiterating and reminding firms of their obligations surrounding ETPs.

FINRA found that Wells Fargo failed to implement a sufficient or credible supervisory system to oversee solicited sales of volatility linked ETPs. Broker soliciting sales of volatility linked ETPs should already be cognizant of the significant risks they entail, the limited hold time, and the potential for significant losses.

From 2009 to 2012 however, Wells Fargo placed no restrictions at all on who these products could be recommended too, with no vetting system based on risk profile or investment objectives. More than 1300 clients were affected by the improper sale of these volatility linked ETPs, FINRA estimates. In settling with FINRA for $3.4 million, Wells Fargo neither admitted or denied the charges.

The attorneys at Lax & Neville LLP have extensive experience in successfully prosecuting claims on behalf of customers who have suffered losses as a result of investment and securities fraud.  If you are a victim of fraud, please contact Lax & Neville LLP today at (212) 696-1999 to schedule a consultation.

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