Wells Fargo settles another FINRA case over client records for $2.3M

A blunder by a Wells Fargo team tasked with managing the firm’s last FINRA case involving the “Write Once Read Many” format led to another one five years later, according to the regulator.

Wells Fargo Clearing Services, the parent firm of Wells Fargo Advisors, as well as its independent brokerage, the Wells Fargo Advisors Financial Network, failed to store 13 million records that are “an integral part of an anti-money laundering program” in the required WORM format over the past 17 years, a Dec. 6 letter of acceptance, waiver and consent shows. A working group found out about the problem in November 2016 but didn’t notify another team at Wells Fargo overseeing its FINRA reporting obligations, according to investigators.

The wirehouse finally self-reported the issue with its client identification records in April 2020, the document says. Without admitting or denying FINRA’s findings, the Wells Fargo units agreed to pay a fine of $2.25 million — five years to the month after the regulator ordered the firm to pay $5.5 million to settle its case alleging that Wells Fargo had failed to preserve more than 350 million records in WORM format. The latest FINRA case also comes three months after the Office of the Comptroller of the Currency hit the bank with a fine of $250 million.

The rules obligating firms to store records in non-alterable WORM format are “critically important,” especially as they relate to customer verification files, said Ismael Manzanares, a director of consulting with compliance firm NRS, a ComplySci company. The documents include descriptions of the processes used to confirm clients’ identities and any discrepancies.

“Once you import your records into this WORM system or process, they want to have the confidence that the firm cannot overwrite the information on there,” Manzanares said. “A lot of that information is sensitive.”

Supporting authorities’ anti-money laundering efforts “really can become overwhelming and burdensome” to broker-dealers and RIAs that don’t have the right systems in place, said Marilyn Miles, the head of consulting and education with NRS.

“We're constantly reminding and helping our clients to be compliant in all aspects of books and recordkeeping obligations, both on the BD and the IA side,” Miles said. “It's worse when you find an issue and you don't correct it than if you didn't find it at all. I suspect that was a big issue for FINRA.”

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Representatives for Wells Fargo didn’t go into specifics about the case.

“At Wells Fargo Advisors we take our regulatory responsibilities seriously and we are pleased to have this issue resolved,” spokeswoman Jackie Knolhoff said in a statement.

The 13 million client records span about 8.2 million customers and about 4 million documents that Wells Fargo stored in the non-WORM system after firm personnel first found the deficiency in 2016, according to FINRA. Out of the 13 million records between 2003 and August 2020, 11.7 million were with Wells Fargo Clearing Services and 1.3 million with FiNet, the document states.

The staff reported it to the working group handling Wells Fargo’s response and remediation under the prior books and recordkeeping settlement, only to have them fail to escalate the matter to the separate team managing FINRA reporting, investigators say. In January 2020, another team’s review about whether certain projects would affect the customer identification program detected the problem again, according to FINRA.

The regulator says the firm reported its lack of compliance three months later. In addition to the fine, Wells Fargo agreed to a censure as part of the settlement as well. The regulator censured five of the firm’s units in the 2016 settlements, which were part of a group of cases spanning a dozen companies and $14.4 million in combined payouts over alleged WORM deficiencies affecting hundreds of millions of brokerage records.

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“These disciplinary actions are a result of FINRA’s focus on ensuring that firms maintain accurate, complete and adequately protected electronic records,” FINRA’s then-chief of enforcement, Brad Bennett, said in a statement at the time. “Ensuring the integrity of these records is critical to the investor protection function because they are a primary means by which regulators examine for misconduct in the securities industry.”

On the company’s last earnings call in October, Wells Fargo CEO Charlie Scharf called the end of a separate consent order from the Consumer Financial Protection Bureau in September the firm’s “second important regulatory milestone we achieved this year” after another OCC order expired in January.

“The recent OCC actions are a reminder that the significant deficiencies that existed when I arrived must remain our top priority,” Scharf said. “I believe we're making meaningful progress, and I remain confident in our ability to close the remaining gaps over the next several years. Having said that, it continues to be the case that we are likely to have setbacks along the way. We are a different bank today than we were several years ago. We run the company with greater oversight, transparency and operational disciplines.”