FINRA Fines Wells Fargo $500,000 Over Structured Repackaged Asset-Backed Trust Securities (STRATS)

The Financial Industry Regulatory Authority (FINRA) fined (Case No. 2012033568901) brokerage firm Wells Fargo Advisors, LLC (Wells Fargo) $500,000 concerning allegations that from August 2005, to July 2012, Wells Fargo made unsuitable recommendations to retail customers to purchase Structured Repackaged Asset-Backed Trust Securities (STRATS). FINRA’s findings are in reference to the approximately $12 million worth of the STRATS Wells Fargo sold to its customers during the relevant time period.

STRATS are complex structured products that paid a floating rate of periodic income up to a minimum or maximum rate based on the STRATS Trust's interest in a capital security issued by JP Morgan Chase (JP Morgan) and an interest rate swap contract. The STRATS at issue cost $25 per share at the initial offering and traded thereafter in the secondary market. The STRATS were structured to swap the yield of the underlying JP Morgan capital security at 5.85% for a variable interest rate paid to investors that was tied to a 90 day U.S. Treasury bill rate plus 1%, with a ceiling of 8% and a floor of 3%.

According to FINRA, the STRATS could be terminated by the issuing Trust under certain circumstances including a call or redemption of the underlying JP Morgan capital security. In addition, once terminated, holders of the STRATS would receive the call or redemption proceeds of the underlying capital security and interest minus the termination fee. According to FINRA, because of the swap termination fee, customers who purchased the STRATS could lose a significant percentage of their principal investment under certain circumstances including the redemption of the underlying JP Morgan capital security. FINRA found that Wells Fargo failed to educate its brokers regarding these risks and therefore brokers did not communicate these risks to customers who purchased the STRATS.

FINRA also found that Wells Fargo also failed to provide product specific training to its brokers and internal communications regarding the STRATS failed to adequately describe the risks of investing in these complex products. FINRA called Wells Farrgo’s brokers’ knowledge of the products “limited” particularly their knowledge of the of the product’s termination provisions and its risks. Accordingly, the regulator concluded that FINRA lacked a reasonable basis for recommending the STRATS to its retail customers in violation of industry rules.

In July 2012, JP Morgan redeemed the underlying capital security which caused the STRATS to be terminated. Customers received the proceeds of the redeemed security minus the swap termination fee. Consequently, many customers holding the STRATS received less than the amount they paid for the STRATS.

Investors who have suffered losses may be able recover their losses through securities arbitration. The investment attorneys at Gana LLP are experienced in representing investors in cases where their broker has acted inappropriately. Our consultations are free of charge and the firm is only compensated if you recover.