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SEC, Wells Fargo 
The Securities and Exchange Commission yesterday said it has settled charges – totaling $35 million - against Wells Fargo Clearing Services and Wells Fargo Advisors Financial Network for failings related to sales of “inverse” exchange traded funds. 

The regulator ordered Wells Fargo to pay a penalty to be paid to affected investors.

An inverse ETF is constructed by using derivatives to profit from when a benchmark, such as the S&P 500, drops. Investing in inverse ETFs resembles holding short positions, which involve borrowing securities and selling them with the hope of repurchasing them at a lower price.

The SEC said that its charges against the Wells Fargo entities were for “failing reasonably” to supervise investment advisors and registered representatives who recommended single-inverse ETF investments to retail investors, and for lacking adequate compliance policies and procedures with respect to the suitability of those recommendations. 

The issue relates to how single-inverse exchange traded funds are held for longer than a day, particularly in volatile markets. In these situations investors can suffer large and unexpected losses, the SEC said in a statement. 

The SEC order covers a period from April 2012 through September 2019. In that period, the SEC said that Wells Fargo's “policies and procedures were not reasonably designed to prevent and detect unsuitable recommendations of single-inverse ETFs”.

The regulator continued that Wells Fargo failed to adequately supervise its employees' recommendations regarding single-inverse ETFs, and did not adequately train them concerning those products. The order found that some Wells Fargo brokers and advisors did not fully understand the risk of losses these complex products posed when held long term.

"Firms must maintain effective compliance and supervisory programs to ensure that the securities they recommend are suitable for their clients," Antonia Chion, associate director of the SEC Enforcement Division, said.