Wells Fargo Advisors Admits Failing to Maintain Controls and Producing Altered Document, Agrees to Pay $5 Million Penalty
September 22nd, 2014
from the Securities and Exchange Commission
The Securities and Exchange Commission today charged Wells Fargo Advisors LLC with failing to maintain adequate controls to prevent one of its employees from insider trading based on a customer’s nonpublic information. The SEC also charged Wells Fargo for unreasonably delaying its production of documents during the SEC’s investigation and providing an altered internal document related to a compliance review of the broker’s trading.
Wells Fargo, which admits wrongdoing, has agreed to pay a $5 million penalty to settle the SEC’s charges, which are the first-ever against a broker-dealer for failing to protect a customer’s material nonpublic information.
According to the SEC’s order instituting a settled administrative proceeding, Wells Fargo highlighted in internal documents the risk of its personnel misusing confidential information obtained from retail customers and clients. The risk manifested itself when a Wells Fargo broker learned confidentially from his customer that Burger King was being acquired by a New York-based private equity firm. The broker then traded on that nonpublic information ahead of the public announcement. The SEC charged the broker with insider trading and obtained an asset freeze to prevent him from transferring illicit profits outside the U.S.
The SEC’s order finds that multiple groups responsible for compliance or supervision within Wells Fargo received indications that the broker was misusing customer information. However, these groups lacked coordination or any assigned responsibilities, and they ultimately failed to act on these indications. Federal law requires broker-dealers and investment advisers to establish, maintain, and enforce policies and procedures to prevent such misuse of material nonpublic information. Said Andrew J. Ceresney, Director of the SEC’s Enforcement Division:
When investors entrust private information to their stockbrokers or investment advisers, they have the right to expect that it will not be exploited. In this case – our first against a broker-dealer for failing to protect the nonpublic information conveyed by its customers – Wells Fargo failed to implement procedures to prevent misuse of such information.
The SEC’s order also finds that when SEC investigators sought all documents related to the firm’s compliance reviews of the broker’s trading, Wells Fargo’s document production omitted documents related to the broker’s trading in Burger King stock. Six months after SEC investigators initially requested documents, Wells Fargo produced the Burger King-related review without any explanation as to why it was not produced in the first place. Furthermore, Wells Fargo failed to provide an accurate record of the review because one of the documents had been altered to include additional language before it was produced to the SEC. Said Daniel M. Hawke, Chief of the SEC Enforcement Division’s Market Abuse Unit:
Wells Fargo unreasonably delayed producing documents to the SEC’s staff and altered a previously requested compliance document after the SEC charged a former Wells Fargo employee with insider trading. The firm’s actions improperly delayed our investigation, and the production of an altered document interfered with our search for the truth.
The SEC’s order finds that Wells Fargo violated Section 15(g) of the Securities Exchange Act of 1934 and Section 204A of the Investment Advisers Act of 1940, which require broker-dealers and investments advisers to establish, maintain, and enforce policies and procedures reasonably designed to prevent the misuse of material nonpublic information. Wells Fargo Advisors also violated Sections 17(a) and 17(b) of the Exchange Act and Rule 17a-4(j) as well as Section 204(a) of the Advisers Act, which require broker-dealers and investment advisers to promptly produce accurate books and records to the SEC. Wells Fargo admitted the findings and acknowledged its violation of the federal securities laws. In addition to the $5 million penalty, the firm agreed to retain an independent consultant to review its policies and procedures. The SEC’s order censures Wells Fargo and requires the firm to cease and desist from committing or causing these violations.
The SEC’s investigation was conducted by Megan Bergstrom and David S. Brown of the Market Abuse Unit. The case was supervised by Mr. Hawke and Robert A. Cohen, Co-Deputy Chief of the Market Abuse Unit, and Diana Tani, an Assistant Director in the unit.