Wells Fargo Advisors Agrees to Pay $5 Million Penalty to SEC for Failing to Maintain Adequate Controls and Providing an Altered Document
On September 22, 2014, the SEC announced that it 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,
- 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 admitted its wrongdoing and agreed to pay a $5 million penalty to settle the SEC’s charges.
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 securities laws require broker-dealers and investment advisers to establish, maintain, and enforce policies and procedures to prevent such misuse of material nonpublic information. The SEC’s order found 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.
The SEC’s order also found 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.
The Securities Law Violations
According to the SEC, Wells Fargo violated:
- Section 15(g) of the Securities Exchange Act of 1934 (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),
- Section 204A of the Investment Advisers Act of 1940 (same),
- Sections 17(a) and 17(b) of the Exchange Act (which require broker-dealers and investment advisers to promptly produce accurate books and records to the SEC), and
- Rule 17a-4(j) as well as Section 204(a) of the Advisers Act (same).