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Financial Industry Regulatory Authority (FINRA) Orders Wells Fargo and Banc of America to Reimburse Customers More Than $3 Million and Pay $2.15 Million in Fines for Unsuitable Sales of Bank Loan Mutual Funds

FINRA announced that it had fined two firms a total of $2.15 million and ordered the firms to pay more than $3 million in restitution to customers for losses incurred from unsuitable sales of floating-rate bank loan funds. FINRA ordered Wells Fargo Advisors, LLC (Wells Fargo) to pay a fine of $1.25 million and to reimburse approximately $2 million in losses to 239 customers. FINRA ordered Merrill Lynch, Pierce, Fenner & Smith Incorporated, as successor for Banc of America Investment Services, Inc. (Banc of America), 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 bank loan funds. The customers were seeking to preserve principal, or had conservative risk tolerances, and brokers made recommendations to purchase floating-rate bank loan funds without having reasonable grounds to believe that the purchases were suitable for the customers. FINRA also found that 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.

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

Brad Bennett, FINRA's Executive Vice President and Chief of Enforcement, said, "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."

Sources: FINRA Orders Wells Fargo and Banc of America to Reimburse Customers More Than $3 Million for Unsuitable Sales of Floating-Rate Bank Loan Funds; FINRA Also Fines Wells Fargo $1.25 Million and Banc of America $900,000, FINRA News Release (June 4, 2013); Financial Industry Regulatory Authority Letter of Acceptance, Waiver and Consent 2008014763601 (June 4, 2013).

Copyright © 2020 Godfrey & Kahn S.C.National Law Review, Volume III, Number 197

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About this Author

Chris Cahlamer Investment Management Attorney
Shareholder

Chris Cahlamer is the team leader of the firm’s Investment Management Practice Group, where he practices in investment management and securities law, focusing on investment companies, investment advisers, regulatory examinations, new product development, SEC compliance and reporting obligations, CCO support, private fund formation and operation, investment company reorganizations, investment advisor mergers and acquisitions, and general corporate and board fiduciary issues.

Chris earned his law degree, summa cum laude, at Marquette University Law School. While there, he...

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Carol A. Gehl, Securities Law Attorney, Godfrey and Kahn law firm
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Carol Gehl is a shareholder and the team leader of the Securities Practice Group in the Milwaukee office.

Carol’s practice is focused on investment management entities, including mutual funds, hedge funds, investment advisers and broker-dealers throughout the nation. During the last number of years, Carol has facilitated the organization of numerous mutual funds, hedge funds and investment advisers; assisted in SEC and FINRA examinations of regulated entities; provided ongoing advice to mutual fund Boards of Directors; and assisted with several mergers of investment advisers and reorganizations of mutual funds.

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Susan Hoaglund, Investment Management Attorney, Godfrey Kahn law firm
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Susan Hoaglund is a member of the Investment Management Practice Group. Susan provides advice to investment advisers, investment companies, broker-dealers and banks regarding legal, regulatory and compliance matters.

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