Wells Fargo Advisors is to pay a USD5 million penalty to settle SEC charges that it failed to maintain adequate controls to prevent one of its employees from insider trading based on a customer’s non-public 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.
The SEC charges are the first-ever against a broker-dealer for failing to protect a customer’s material non-public 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 non-public 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 US.
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 non-public information.
“When investors entrust private information to their stockbrokers or investment advisers, they have the right to expect that it will not be exploited,” says Andrew J Ceresney, director of the SEC’s enforcement division. “In this case – our first against a broker-dealer for failing to protect the non-public 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.
“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,” says Daniel M Hawke, chief of the SEC enforcement division’s market abuse unit. “The firm’s actions improperly delayed our investigation, and the production of an altered document interfered with our search for the truth.”
