Wells Fargo Advisors Slapped with $5M Penalty for Failure to Maintain Controls

By Christopher Pugh, Fall 2014 Student Intern

controlAccording to a news release from the SEC, Wells Fargo Advisors admitted that an employee accessed and used a customer’s nonpublic information to engage in insider trading and will pay a $5 million penalty.  The SEC charged Wells Fargo with a failure to maintain controls, that is, they did not keep the customer’s nonpublic information confidential. Multiple groups at Wells Fargo in charge of compliance failed to act after they knew of a possible misuse of confidential information.  The company’s compliance groups lacked the necessary coordination and communication to act on the known risk and failed to maintain adequate controls.  The employee 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 nonpublic information ahead of the public announcement.

The lesson to be learned from this scandal is that broker-dealers have a duty to keep their customer’s nonpublic information confidential, and violating that duty has consequences. Broker-dealers must establish controls to prevent employees from misusing confidential information.  According to Andrew J. Ceresney, Director of the SEC’s Enforcement Division “when investors entrust private information to their stockbrokers or investment advisers, they have the right to expect that it will not be exploited.  In this case Wells Fargo failed to implement procedures to prevent misuse of such information.”

whistleCompanies with suspicions that their confidential information is being misused by their broker-dealer can report it to the SEC through the  Office of the Whistleblower. For more information, be sure to check out the SEC’s full news release: Wells Fargo Advisors Admits Failing to Maintain Controls.