Last Friday, Wells Fargo Clearing Services and Wells Fargo Advisors Financial Network, the broker-dealer and investment adviser subsidiaries of Wells Fargo bank, settled an administrative proceeding with the SEC for conduct violating the Investment Advisers Act for $35 million.
What caught my eye is that the conduct underlying the settlement occurred between 2002 and 2014 but wasn’t discovered until Wells Fargo received an inquiry in the fall of 2018 from the Connecticut Banking Department. In summary, Wells Fargo and several predecessor firms, permitted its advisors to reduce the firms’ standard advisory fees for certain clients at the time of account opening. The advisers made handwritten or typed revisions on the clients’ investment advisory agreements reflecting the reduced fees. But, in certain instances, account processing employees failed to enter the agreed upon reduced fees into the firms’ billing system, resulting in clients being overcharged. The SEC administrative order criticized Wells Fargo for failure “to adopt and implement written compliance policies and procedures reasonably designed to prevent overbilling.” Basically, Wells Fargo didn’t conduct any review and testing of it account opening processes to check if the negotiated fee changes were accurately reflected in its billing system. In essence, the SEC said, “This went on for 12 years and you didn’t catch it – yeah, that’s gonna cost you $35 million.”
The lesson here is the SEC expects firms to have processes in place – quality control measures, policy and procedures, training and audits – to catch their mistakes, so they don’t continue for 12 years. This should serve as another example of how firms need to be proactive in implementing internal review measures to prevent and detect problems before the cost $35 million in fines.
