FINRA fines Wells Fargo Clearing Services $1.25M for violations involving muni securities

Wells Fargo Clearing Services has consented to sanctions including a $1.25 million fine to settle Financial Industry Regulatory Authority allegations of various rule violations involving municipal securities, including one relating to "close-out requirements."

The majority of the $1.25 million fine ? $937,500 ? pertains to violations of two Municipal Securities Rulemaking Board rules, MSRB Rule G-12 and MSRB Rule G- 27, according to a settlement document accepted by FINRA Jan 8. In addition to the fine, the firm also consented to the imposition of a censure.

St. Louis-based Wells Fargo Clearing Services, which uses the trade name Wells Fargo Advisors, consented to FINRA's findings without admitting or denying them. The firm employs more than 18,000 registered representatives in more than 5,000 branch offices.

"Wells Fargo (WFC) failed to comply with the close-out requirements of MSRB Rule G12(h)," FINRA said in its findings, which were contained in the document.

MSRB Rule G-12 establishes uniform industry practices for the processing, clearance and settlement of municipal securities transactions between dealers. Since 2016, MSRB Rule G-12(h) has required that firms cancel or close out failed inter-dealer transactions not later than 10 calendar days after settlement date, unless the buyer grants the seller a one-time extension of 10 calendar days, "thereby providing a total of 20 calendar days to complete the transaction," FINRA said in its findings.

"In all instances, however, inter-dealer fails must be closed out within no more than a total of 20 calendar days after settlement date," FINRA said.

FINRA found that from November 2016 through November 2023, the firm failed to cancel or close out 209 inter-dealer transactions after failing to receive municipal securities totaling about $6.5 million for over 20 calendar days after settlement date. About half of those "fails-to-receive" were aged more than 50 days, FINRA said in its findings.

"Although MSRB Rule G-12(h) provides three options through which firms can close out fails, the firm relied primarily on repeated buy-in attempts until a position was covered ? even when the firm knew that these attempts were not successful within the 20-calendar day limit," FINRA said in its findings.

During the relevant November 2016 through November 2023 period, the firm also failed to deliver 106 municipal securities totaling about $3.8 million within 20 calendar days after settlement date, according to FINRA's findings.

"Therefore, Wells Fargo (WFC) violated MSRB Rule G-12(h)," FINRA said.

FINRA also found that during the relevant period, the firm "failed to promptly obtain physical possession or control of 178 short positions totaling approximately $4.1 million resulting from failures to receive municipal securities," which violated Securities Exchange Act of 1934 Section 15(c)(3), Exchange Act Rule 15c3-3(d)(2), and FINRA Rule 2010.

In addition, FINRA found that during the November 2016 through November 2023 period, Wells Fargo (WFC) had failed to establish and maintain a supervisory system, including written supervisory procedures, sufficiently designed to attain compliance with MSRB Rule G-12(h) and Exchange Act Rule 15c3-3( d)(2).

"As a result, the firm violated MSRB Rule G-27," FINRA said.

In December 2023, Wells Fargo (WFC) "updated its system and processes for addressing municipal fails-to-receive and revised its WSPs to memorialize the changes," FINRA said in its findings.

"We are pleased to resolve this matter," Wells Fargo (WFC) said in a statement provided to The Bond Buyer on Monday. "As noted by FINRA, we updated the relevant supervisory procedures two years ago."