The Financial Industrial Regulatory Authority (:FINRA), the largest independent securities regulatory firm, has fined the brokerage arms of Wells Fargo & Company (WFC) and Bank of America Corporation (BAC) for an amount totaling $2.15 million for the alleged sale of floating-rate bank loan funds that went against the risk options of its clients. Alongside, FINRA has ordered both the banks to pay more than $3 million in compensation to its customers.
As per the settlement with FINRA, Wells Fargo has been ordered to compensate its 239 clients with $2 million. Additionally, the bank is required to pay a fine amounting to $1.25 million.
On the other hand, BofA has been slapped with a fine of $900,000. Moreover, it has been asked to reimburse around $1.1 million to its 214 customers.
Although Wells Fargo and BofA agreed to the terms of the settlement, both the banks refrained from admitting or denying the charges.
The settlement relates to the activities that took place between 2007 and 2008 when Wells Fargo and BofA recommended the ill-suited mutual funds to its clients. Both these banks permitted their brokers to sell floating-rate bank loan funds to the investors.
The clients of these two banks were seeking conventional investments. However, Wells Fargo and BofA sold floating rate bank loan funds that exceeded the risk tolerance of the customers. Moreover, the features of the floating-rate bank loans failed to meet the investment objectives of clients who were seeking safer investments.
Further, between 2007 and 2008, the value of these funds depreciated due to the financial crisis. This resulted in the clients suffering huge losses.
Moreover, both Wells Fargo and BofA failed to train their brokers about the risks and characteristics that are unique to the funds. Additionally, these two banks failed to supervise the sale of these funds.
Floating-rate bank loan funds are mutual funds that invest in a portfolio of secured senior loans that are offered to entities whose credit quality have been rated below investment grade, thus making the investments highly risky. Moreover, these funds are thinly traded and often turn illiquid.
The verdict is expected to drive firms and their brokers to ensure that the investment recommendation fulfills the investment criteria of clients and is also within their risk capacity.
Of late, FINRA has penalized several firms that include Ameriprise Financial, Inc. (AMP). FINRA penalized Ameriprise and it’s clearing firm, American Enterprise Investment Services Inc., for $750,000. The company and its affiliate were penalized on the grounds of failure to properly oversee wire-transfer requests and the transfer of customer funds to third-party accounts.
Wells Fargo and BofA carry a Zacks Rank #3 (Hold). Enterprise Financial Services Corp. (EFSC) is a better performing stock with a Zacks Rank #1 (Strong Buy).
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