The Financial Industry Regulatory Authority (FINRA) announced that is has fined Wells Fargo Investments, LLC (Wells Fargo) $2 million related to the sales of unsuitable reverse convertible notes to elderly customers. The sales were made by one of Wells Fargo’s former brokers to 21 customers, most of whom were in their 80’s and 90’s.
Reverse convertible notes are complex structured products that consist of a short-term, interest bearing note in which repayment of the principal is linked to the performance of an unrelated asset such as a stock or basket of stocks. If the underlying asset falls below a certain level, an investor risks incurring a substantial loss.
According to FINRA, the investigation revealed that the broker recommended hundreds of unsuitable reverse convertible notes to 21 unsophisticated, elderly clients with a low-risk tolerance which exposed the customers to risk inconsistent with their investments profiles. FINRA also stated that the sales of the reverse convertibles generated in excess of $1 million in commissions to the broker and firm. According to FINRA, Wells Fargo failed to review the reverse convertible transactions to make sure they were suitable for the customers.
Wells Fargo consented to the entry of FINRA’s findings but neither admitted nor denied the allegations.