Wachovia and AG Edwards, an investment firm that Wachovia had acquired just before the crisis, gave certain customers discounts to their standard advisory fees — yet they sometimes failed to enter the discounts into Wachovia billing systems.
Wells Fargo did not catch the discrepancies for years after the acquisition, the SEC said, and its advisors continued to offer discounts that weren't reflected in customer billing. The company learned about the issue in 2018 after Connecticut banking regulators asked about it, prompting a review at Wells Fargo that uncovered nearly 11,000 accounts nationwide were overcharged.
"Today's enforcement action underscores the need for firms growing their businesses through acquisition to ensure that their growth does not come at the expense of client protection," Gurbir S. Grewal, director of the SEC's enforcement division, said in the release.
The Wachovia acquisition was far from ideal. It was part of the shotgun marriages of banks during 2008, as troubled mortgage portfolios at Wachovia and elsewhere helped bring the global financial system to its knees.
But the deal helped massively extend Wells Fargo's reach and brought Wachovia's expansive advisor network to the San Francisco bank.
Wells Fargo didn't have much time to do due diligence on the deal during 2008, noted John Gebauer, chief regulatory officer at the risk advisory firm Comply. "But they had plenty of time after that transaction to run a smooth integration and to review what they bought," Gebauer said.
The order highlights the importance of conducting extensive compliance checks on billing and other issues as the advisor industry continues going through a wave of consolidation, Gebauer added.
The process that advisors at Wells Fargo and its acquired firms used to offer discounts on preset fees for certain clients stopped in 2014. But some customers who opened up accounts before 2014 continued to be overcharged until last December, the SEC said.
In a statement, the company — which did not admit or deny the SEC charges — said it was pleased to resolve the issue.
"The process that caused this issue was corrected nearly a decade ago," the company said. "And, as noted in the settlement documents, Wells Fargo Advisors conducted a thorough review of accounts and has fully reimbursed affected customers."
Wells Fargo has reimbursed affected customers more than $26 million from the fees it overcharged and $13 million in interest, the SEC said.
The order said that staff had to manually input agreed-upon discounts to a new customer account setup tool, which "did not automatically populate" those one-off discounts. That was then transferred to a legacy Wachovia billing system that the order said is still in use today.
While Wells Fargo advisors could review the finalized information for discrepancies, the company "did not have policies or procedures" that required them to review and confirm the accuracy of charges, the SEC order said.
The company did have a quality control process in place from 2009 to 2014 aimed at flagging discrepancies — but it was only for accounts with more than $250,000 when they were opened, the SEC order said.
The quality control process spread to smaller accounts starting in 2014, but the company did not do a historical lookback to examine past discrepancies, the SEC said.
In Connecticut, where banking regulators first flagged the issue, Wells Fargo found that it overcharged 145 out of more than 57,000 accounts. Most of those dated back to the AG Edwards and Wachovia days.
Last year, Wells Fargo began using a tech-enabled process to identify errors for roughly 2.2 million accounts across the country. In all, the bank found it overcharged 10,800 other accounts.
The fine is one of a number of penalties the $1.9 trillion-asset company has paid in recent years, some much larger ones tied to consumer-abuse scandals.
Last December, the Consumer Financial Protection Bureau
CEO Charlie Scharf, who joined the company in late 2019, has said overhauling the company's risk and control framework remains Wells Fargo's "top priority and will remain so."
Dan Shaw contributed to this article.
