Wells Fargo (NYSE:WFC) and Bank of America Corp (NYSE:BAC) are the latest to be critiqued and fined by The Financial Industry Regulatory Authority, Wall Street’s watchdog. It has mandated that both of the firms pay up after selling floating-rate bank loans funds to their customers. The companies are responsible for paying $3 million to customers who suffered losses in 2007 and 2008, and $2.15 million to the self-regulator for failing to act in the best interest of customers, and according to their needs.
Explained by Reuters, these 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.” Because they carry significant credit risk, it is imperative that firms train their brokers sufficiently on how to handle the risks and characteristics of the funds. Wells Fargo and Bank of America’s Merrill Lynch unit were fined because their brokers failed to do just that. Even when certain customers sought conservative investments, their brokers recommended concentrated purchases of the funds — sales knowingly precarious and unsuitable.
Because it is the broker’s responsibility to protect his customer and make sure that investment recommendations are congruous with that customer’s expectations and objectives, failure to do so results in a fine and customer reimbursement.
Wells Fargo was ordered to reimburse $2 million in losses to 239 customers, and pay a fine of $1.25 million to the regulator, while Merrill Lynch was required to pay $1.1 million to 214 customers in restoration and pay a $900,000 fine.