FINRA fines firms $21.5 million for unsuitable investments

FINRA has fined two firms a total of $2.15 million and ordered them to pay more than $3 million in restitution to customers for losses incurred from unsuitable sales of floating-rate bank loan funds.

The regulator ordered Wells Fargo Advisors, LLC, as successor for Wells Fargo Investments, LLC, to pay a fine of $1.25 million and to reimburse approximately $2 million in losses to 239 customers.

FINRA also ordered Merrill Lynch, Pierce, Fenner & Smith Incorporated, as successor for Banc of America Investment Services, Inc., to pay a fine of $900,000 and to reimburse approximately $1.1 million in losses to 214 customers.

Floating-rate bank loan funds are mutual funds that generally invest in a portfolio of secured senior loans made to entities whose credit quality is rated below investment-grade. The funds are subject to significant credit risks and can also be illiquid.

FINRA found that Wells Fargo and Banc of America brokers recommended concentrated purchases of floating-rate bank loan funds to customers whose risk tolerance, investment objectives, and financial conditions were inconsistent with the risks and features of floating-rate loan funds.

The customers were seeking to preserve principal, or had conservative risk tolerances, and brokers made recommendations to purchase floating-rate loan funds without having reasonable grounds to believe that the purchases were suitable.

FINRA also found the firms failed to train their sales forces regarding the unique risks and characteristics of the funds, and failed to reasonably supervise the sales of floating-rate bank loan funds.

Brad Bennett, FINRA’s vice president and chief of enforcement, says, “As investors continue to look for yield in a low-interest-rate environment, these actions should serve as a reminder that brokers and their firms need to ensure that investment recommendations are consistent with customers’ investment objectives and risk tolerances.”

In concluding the settlement, Wells Fargo and Banc of America neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

FINRA’s investigation was conducted by Thomas Kimbrell and Wendy Velez, under the supervision of Joshua Doolittle and Thomas Lawson.

Staff

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