Wells Fargo & Co.’s (WFC) brokerage arm has been fined $1 million by the Financial Industry Regulatory Authority (FINRA). Wells Fargo Advisors’ failure to provide prospectuses in a timely manner to customers who purchased mutual funds in 2009 and delay in reporting required information regarding its brokers prompted FINRA to charge the fine.
Customers are supposed to receive prospectuses within three business days of the transaction, according to federal securities laws. However, it was found that around 934,000 customers of Wells Fargo, who purchased mutual funds in 2009, received their prospectuses from one to 153 days beyond schedule.
In fact, Wells Fargo failed to take adequate corrective actions after getting reports that between 4–9% of the firm’s mutual fund customers failed to receive required prospectuses on time.
Wells Fargo also delayed in reporting material information about its current and former representatives, including arbitrations and complaints involving its representatives.
Under FINRA rules, a securities firm must update broker’s information to FINRA within 30 days of the firm learning that a significant event has occurred –– including notification of a formal investigation, customer complaints or arbitrations filed against the representative.
It was found that from July 1, 2008, to June 30, 2009, Wells Fargo failed to provide timely update 8.1% of their Forms U4 –– broker’s registration forms, and 7.6% of the Forms U5 –– termination notice forms. The company made around 190 late amendments to these forms.
While Wells Fargo neither admitted nor denied the charges, it consented to the FINRA’s findings for settling the matter.
Post financial crisis, the regulators went in for rigorous investigations on all fraudulent practices of the Wall Street companies. Last month, UBS AG’s (UBS) wealth management services unit was fined by FINRA for misleading investors about the risks associated with certain notes of Lehman Brothers Holdings it sold.
FINRA has fined UBS AG with $2.5 million and further imposed a $8.25 million payment in restitution for omissions and statements it had made that culminated in investors being misled regarding the “principal protection” feature of 100% Principal-Protection Notes Lehman issued prior to its bankruptcy filing in September 2008.
Stepping up of investigations by the regulators is good news for investors who have suffered significant losses from fraudulent activities of companies related to the investment risks. However, such fines tarnish a company’s reputation and may also put its financials at stake.
Wells Fargo shares retain a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals and the current penalty amount, which is not very much of a burden for the company, we are maintaining a long-term Neutral recommendation on the stock.
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