The Securities and Exchange Commission (SEC) has imposed a $35 million fine on Wells Fargo for allegedly overcharging nearly 11,000 clients a total of $26.8 million in advisory fees.
According to the commission, advisors at Wells Fargo agreed with clients to lower the standard fees and made a note of this in their advisor agreements, either by typing or writing it by hand.
However, in many instances, Wells Fargo’s account-processing employees failed to enter the reduced rate into the system, resulting in clients being charged the standard advisor fee, which was higher than the agreed-upon amount.
Wells Fargo has since taken steps to update its compliance protocols, and the SEC has acknowledged that the affected clients have been repaid approximately $40 million to cover the overcharges and interest.
A spokeswoman for Wells Fargo stated that they are pleased to reach a resolution on this matter and emphasized that the process leading to the issue was addressed almost a decade ago. The company conducted a thorough review of accounts and fully reimbursed affected customers, as stated in the settlement documents.
This settlement marks another blow to Wells Fargo’s reputation, as the bank has faced a series of allegations, including the infamous fake account scandal and accusations of conducting sham job interviews for already-filled positions with diverse candidates.
The issue regarding advisor fees traces back to client accounts held under firms that later merged with Wells Fargo. This includes AG Edwards, which merged with Wachovia in 2007, and Wachovia itself, which merged with Wells Fargo in 2008 during the financial crisis.
Advisors at AG Edwards and Wachovia utilized what they referred to as “shelf agreements” with clients. These were hard copies of the advisor agreements that they sometimes modified with typed or handwritten notes offering advisory services at rates below the firms’ standard fees.
Wells Fargo Settlement with SEC
Ensuring Compliance and Accountability in the Financial Industry
The recent settlement between Wells Fargo and the Securities and Exchange Commission (SEC) sheds light on a critical issue within the financial industry. It highlights the importance for investment advisors to uphold their agreements with clients, including those inherited from predecessor firms.
According to the SEC, Wells Fargo lacked a compliance program to ensure that account fees were accurately matched to the agreed-upon rates. While a quality control process had been in place for accounts exceeding $250,000 from 2009 to 2014, a policy change in September 2014 extended the review process to include all accounts.
Unfortunately, this change came too late for some clients. Wells Fargo continued to overcharge clients who had opened accounts prior to the policy shift, resulting in millions of dollars in excessive fees. Gurbir Grewal, director of the SEC’s Enforcement Division, emphasizes the severity of this issue and calls upon other firms to take note.
In response to the settlement, Wells Fargo has agreed to implement a series of measures. Firstly, the firm has discontinued shelf agreements with new clients as of August 2021, with few exceptions. Secondly, Wells Fargo has consented to a cease-and-desist order and received a censure, acknowledging the incident and its impact on their record.
This case serves as a crucial reminder to all investment advisors that honoring client agreements is paramount. With ongoing merger and acquisition activities in the industry, commitment to compliance becomes even more critical. Investment advisors must adopt comprehensive policies and procedures to ensure accountability and foster trust with their clients.
Let this be an opportunity for the financial industry as a whole to evaluate internal practices and make a steadfast commitment to maintaining the utmost integrity in serving their clients’ best interests.