FINRA’s investigation showed that the firm failed to deliver the required prospectuses to customers in approximately 6,000 of approximately 22,000 transactions between July 2003 and December 2004. The market value of these 6,000 transactions was approximately $256 million, FINRA said in a news release.
At the time, Wachovia Securities, LLC, was a subsidiary of Wachovia Corporation, which recently merged with Wells Fargo & Company (see “Wachovia Leaves Citigroup at the Altar“).
The classes of securities involved include: exchange-traded funds (ETFs), collateral mortgage obligations (CMOs), auction market preferred securities, corporate debt securities, preferred stocks, mutual funds, alternative investment securities, equity syndicate initial public offerings (IPOs), and secondary purchases of equity non-syndicate initial public offerings.
FINRA said the firm’s failures to deliver prospectuses resulted from multiple causes, including coding errors, failures by certain business units to notify the firm’s operations department that a prospectus was required to be delivered, and a failure to monitor and supervise the activities of its outside vendor contracted to deliver the prospectuses. FINRA also found that Wachovia Securities had failed to have adequate supervisory procedures in place to ensure that customers received prospectuses.
During the period involved, broker/dealers were required by federal securities laws and FINRA rules to deliver hard-copy prospectuses to prospective investors, FINRA noted. On December 1, 2005, the Securities and Exchange Commission (SEC) adopted a new set of prospectus delivery rules that established an “access equals delivery” standard for many, but not all, securities (including mutual funds and ETFs).
In settling this matter, Wachovia Securities neither admitted nor denied the charges. As part of the settlement, a senior officer of the firm will certify that it has adopted and implemented systems and procedures reasonably designed to achieve compliance with the delivery of prospectuses and product descriptions, FINRA said.
“Disclosure of product information to the public is of paramount importance,” said Susan Merrill, FINRA executive vice president and chief of enforcement, in the release. “When a firm fails to provide prospectuses and other offering documents, it deprives the investing public of information valuable in making informed investment decisions. Equally troubling were firm supervisory failures that caused a failure to provide FINRA with timely and accurate information.”