On December 15, 2011 the Financial Industry Regulatory Authority (FINRA) announced that it fined Wells Fargo Investments, LLC, $2 million for unsuitable sales of reverse convertible securities to elderly customers.  In addition, the firm is required to pay restitution to customers who did not receive UIT sales charge discounts and to provide restitution to certain customers found to have unsuitable reverse convertible transactions.

Also known as “revertible notes” or “reverse exchangeable securities”, reverse convertibles are interest-bearing notes in which repayment of principal is tied to the performance of an underlying asset, such as a stock or a basket of stocks. Depending upon the reverse convertible’s specific terms, an investor risks sustaining a loss if the value of the underlying asset falls below a certain level at maturity, or during the term of the reverse convertible.

In addition to the reprimand, FINRA filed a complaint against Alfred Chi Chen, the former Wells Fargo registered representative responsible for recommending and selling the unsuitable reverse convertibles, and making unauthorized trades in several customer accounts, including accounts of deceased customers.  Chen recommended hundreds of unsuitable reverse convertible investments to 21 clients, fifteen of whom were over 80 years old.  These transactions exposed investors to risk inconsistent with their investment profiles, and resulted in overly concentrated reverse convertible positions in their accounts.

FINRA also found that Wells Fargo had insufficient systems and procedures to monitor for unsuitable reverse convertibles sales.  As a result of these deficiencies, the firm failed to provide certain eligible customers with breakpoint and rollover and exchange discounts in their sales of UIT’s.  UIT’s offer sales charge discounts on purchases that exceed certain thresholds (“breakpoints”) or involve redemption or termination proceeds from another UIT during the initial offering period. Between January 2006 and July 2008, Wells Fargo failed to provide certain eligible customers with these “breakpoint” and “rollover and exchange” discounts.