Days after SEC and FINRA enforcement officials stressed the regulators’ focus on anti-money laundering rules and the duty of best execution, two new cases added examples to their words.
In respective separate May 20 and May 19 settlements with the SEC, Wells Fargo Clearing Services — which operates under the trade name of Wells Fargo Advisors — agreed to pay $7 million over the regulator’s allegation it failed to file dozens of suspicious activity reports in a timely manner, while First Republic Investment Management — an RIA subsidiary of First Republic Bank — will pay $1.8 million to settle SEC charges it breached best execution and fiduciary rules. In settling the cases, the firms neither admitted nor denied the allegations.
The two cases followed Wells Fargo’s FINRA case in December relating to recordkeeping obligations under anti-money laundering laws, as well as JPMorgan Chase’s agreement that month to pay $200 million to settle its own recordkeeping cases with the SEC and the Commodity Futures Trading Commission. First Republic’s settlement comes after more than 100 cases in recent years involving disclosures of conflicts of interest and best execution requirements in wealth managers’ mutual fund recommendations. Enforcement officials discussed both kinds of cases last week in a panel at FINRA’s annual conference.
“We’ve had the same response from a couple of firms where there was suspicious activity, obviously suspicious,” FINRA Deputy Head of Enforcement Christopher Kelly said. “And we asked the firm, ‘Why didn’t you file a suspicious activity report?’ And they said, ‘Well, you had asked me about it, so we figured the government knew.’ The government’s a big place. Don’t trust that just because FINRA knows, the SEC knows, everybody knows. So go ahead and, if you think you should file the form, file the form, please.”
As for the best execution for clients in their choices of mutual fund share classes, industry experts have been warning about the regulators’ emphasis for the past couple of years even as they criticize the regulator’s application of the duty as “regulation by enforcement.” Whether in terms of the mutual fund cases or the December 2020 case involving Robinhood’s payment for order flow practices, the SEC has had at least one big case a year for the past five, SEC Associate Enforcement Director Melissa Hodgman noted in the panel discussion.
The industry should think of SEC Chair Gary Gensler as a plumber looking at “the pipes of the system” and one who “doesn’t like the leaks,” Hodgman said.
“It’s an area where you need to be making sure that you understand how those products are working within the process of the system and whether or not those disclosures are good enough,” she said. “Have you given fulsome disclosure? Do you know how the product works? How is it working within the system more broadly? Because this is a market integrity issue for us, as well as a market structure issue. And so we’ll be coming to talk to you about it. And by the way, when we come to talk to you, we want to partner with you.”
Regulators have been corresponding with firms about cases like Wells Fargo’s latest one for several years, including with the firm itself. The fine amounts to double what the firm agreed to pay in November 2017, when the SEC alleged that Wells Fargo failed to file 50 suspicious activity reports in a timely manner between March 2012 and June 2013. The Bank Secrecy Act and Treasury Department regulations make it mandatory for brokerages to file the reports with the Financial Crimes Enforcement Network.
Wells Fargo ran afoul of those rules between April 2017 and October 2021, when a new version of its internal alert system launched in January 2019 failed to trigger alerts about transactions in “high-risk or moderate-risk countries” and certain wire transfers such as those occurring on bank holidays “without a corresponding brokerage holiday,” according to the SEC’s settlement order.
In all, the firm’s system failed to generate 2,366 alerts to Wells Fargo’s Financial Crimes Investigation units over the period, the SEC says. Subsequently, 34 suspicious activity reports about the transactions came in several months or even years after the 30-day filing deadline, according to investigators.
“When SEC registrants like Wells Fargo Advisors fail to comply with their AML obligations, they put the investing public at risk because they deprive regulators of timely information about possible money laundering, terrorist financing or other illegal money movements,” SEC Enforcement Director Gurbir Grewal said in a statement. “Through this enforcement action, we are not only holding Wells Fargo Advisors accountable, but also sending a loud and clear message to other registrants that AML obligations are sacrosanct.”
“At Wells Fargo Advisors, we take regulatory responsibilities seriously,” spokeswoman Shea Leordeanu said in an email. “This matter refers to legacy issues that impacted a transaction monitoring system and the issues were resolved promptly upon discovery.”
At First Republic’s RIA, the firm’s case stems from the SEC’s allegations about its conduct between February 2014 and, in terms of written compliance procedures, up to the present day. The San Francisco-based firm breached its fiduciary and best execution duties by investing clients in mutual funds and cash sweep products that racked up revenue sharing payments for First Republic’s brokerage without adequate disclosures to clients and, in certain instances, when other available share classes “presented a more favorable value for these clients under the particular circumstances in place at the time of the transactions,” according to the SEC.
By January 2019, the firm had bulked up its disclosures and moved clients to available lower-cost share classes, investigators say. By the following January, the firm no longer placed any clients into cash sweep products that came with revenue sharing agreements, the SEC says. In settling the case, First Republic agreed to pay disgorgement of $1.3 million, prejudgment interest of $243,000 and a civil money penalty of $250,000.
A spokesman for First Republic declined to comment on the case.