Wells Fargo's Wealth Management Unit Under Investigation--3rd Update

03/01/18 02:16 PM EST
By Emily Glazer 

Wells Fargo & Co.'s problems are expanding to its wealth-management business.

The Justice Department in late 2017 told the bank to conduct an independent investigation of its wealth-management business after whistleblowers from the bank cited sales problems to the agency, people familiar with the matter said.

Wells Fargo on Thursday disclosed the board's investigation in a securities filing, saying it was "in response to inquiries from federal government agencies."

The bank said the board's review is assessing "whether there have been inappropriate referrals or recommendations, including with respect to rollovers for 401(k) plan participants, certain alternative investments, or referrals of brokerage customers to the company's investment and fiduciary services business."

The bank tapped law firm Shearman & Sterling to conduct the investigation, the people said.

The claims include Wells Fargo's brokerage division, which is known as Wells Fargo Advisors. Wells Fargo's former head of that division, Mary Mack, was tapped in July 2016 to clean up its retail banking business. More recently, she was promoted to also lead its consumer lending unit.

Chief Executive Timothy Sloan reiterated in a release that the bank is "committed to a thorough review of many processes" and "when we discover a problem, we are moving to find the root cause and fix it."

A spokeswoman for the Justice Department said it doesn't "confirm, deny or otherwise comment on the existence of an investigation."

Shares of Wells Fargo slid 0.9% to $57.88 in afternoon trading Thursday.

It is unclear exactly what Shearman & Sterling has found so far in its investigation, which the bank disclosed is in the "preliminary stages," according to the filing.

Shearman & Sterling has represented the bank's board since Wells Fargo disclosed widespread sales practice problems in September 2016. It also spearheaded a 113-page report on the bank's sales practices issues.

The April 2017 report was a long-anticipated deep dive into the questionable sales conduct affecting up to 3.5 million accounts that dated back to 2002 and ultimately resulted in a $185 million regulatory penalty in September 2016.

The bank has faced continued problems since then. Most recently, the Federal Reserve announced an unprecedented enforcement action capping the bank's assets. The Fed also said the bank would be replacing four board directors in 2018. The bank has said it is confident it will satisfy the requirements of the Fed action.

In a tense exchange with Sen. Elizabeth Warren (D, Mass.) during an appearance before the Senate Banking Committee on Thursday, Fed Chairman Jerome Powell agreed to consider putting Wells Fargo's plans before the Fed board for a vote, rather than leaving the decision to a lower-ranking agency official.

Mr. Powell added that Wells Fargo may have the growth restriction lifted before it finishes implementing the plans. "We will not lightly lift it, " he said. But "If we see them on track, the growth restrictions could be addressed."

Last year, Wells Fargo said it also improperly charged around 800,000 auto-loan customers and up to 110,000 mortgage customers. The bank has said it is in the process of refunding those customers more than $100 million.

Wells Fargo also disclosed in the Thursday filing that it is reviewing fee calculations within certain fiduciary and custody accounts. The bank has found instances of incorrect fees applied to certain assets and accounts that resulted in overcharging customers, according to the filing.

"Systems, operations and account-level reviews are under way to determine the extent of any assets and accounts affected, and root cause analyses are being performed with the assistance of third parties," the bank said, adding that the review is in the preliminary stages and initially focused on assets that aren't publicly traded.

Wells Fargo also said it is reviewing policies, practices and procedures in its foreign-exchange business. It also is responding to inquiries from government agencies "in connection with their reviews of certain aspects of our FX business."

The Wall Street Journal reported in late 2017 that the bank had fired four FX bankers, and federal prosecutors opened an investigation of the FX operation.

Mr. Sloan, in a Thursday press release, acknowledged that the new problems "may seem discouraging" but told employees to "remember that we are making significant progress in our work to build a better Wells Fargo, and we recognize that more challenges and more hard work lie ahead."

--Lalita Clozel contributed to this article.

Write to Emily Glazer at emily.glazer@wsj.com


(END) Dow Jones Newswires

March 01, 2018 14:16 ET (19:16 GMT)

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