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Wells Fargo Brokerage Arm Under Massachusetts Investigation

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The employees at the brokerage division of Wells Fargo & Company (WFC - Free Report) are being investigated for any possible customer abuses made by them. Recently, William Galvin, the top securities regulator of Massachusetts announced that his office has started investigating the wealth management arm of Well Fargo to see if the division has been steering rollover money into managed accounts or if its employees have been making investment recommendations that are unsuitable for its clients’ needs.

This investigation comes almost a week after Wells Fargo, in its 10K filing, revealed that it was conducting an internal review to assess whether there had been unjustified referrals or recommendations, with respect to rollovers for 401(k) plan participants, alternative investments and referrals of brokerage customers to the bank’s investment and fiduciary services business.

Wells Fargo had agreed to do a detailed investigation, only after facing probes from the financial regulators in late 2017 for forcing customers to buy products and services they did not require.

The bank did find that in some cases customers were overcharged in connection with certain assets and accounts. There have been issues with incorrect set-up and maintenance in the system of record of the values associated with certain assets.

However, Wells Fargo has not yet determined the number of accounts that were affected, along with the reasons that led to the wrongdoings.

Shea Leordeanu, a spokeswoman for the bank’s brokerage division, recently stated that the bank has made "significant progress in our work to identify and fix any issues, make things right and build a better, stronger company."

Thus, Galvin said that his office was seeking information about the scope of Wells Fargo’s investigation. They have asked the bank to give them information regarding “inappropriate referrals of brokerage customers to managed and advisory accounts, unsuitable recommendations of alternative investments, as well as unsuitable referrals and recommendations in connection with 401(k) rollovers.”

Galvin mentioned, “Given the recent retirement savings crisis in America, referrals and recommendations involving 401(k) accounts should be closely scrutinized, in light of the Department of Labor’s Fiduciary Rule.”

Troubles started for Wells Fargo since September 2016 when its employees, seeking to hit sales targets, opened millions of unauthorized accounts for its customers without their prior permission. To settle the case, the bank had agreed to pay $190 million to the federal and state regulators.

Galvin said in a statement, "Wells Fargo's recent banking scandal, which involved opening bogus accounts for their customers, leads me to believe that where there is smoke, there's fire. I need to be assured that Massachusetts residents haven't been burned by corporate greed."

We believe that while these legal expenses are likely to hurt Wells Fargo’s bottom-line growth, its consistent growth in loans and deposits, lower tax rate and expansions will likely support its growth profile.

Shares of the company gained 12% in the past six months, underperforming 20.6% growth of its industry.



Currently, Wells Fargo carries a Zacks Rank #3 (Hold).

A few better-ranked stocks from the same space are BB&T Corporation (BBT - Free Report) , Citigroup Inc. (C - Free Report) and Comerica Incorporated (CMA - Free Report) . Each of them has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

BB&T has witnessed upward earnings estimate revision of 11.6% for the current year over the past 60 days. Its share price increased 15.3% in the past year.

Citigroup witnessed upward earnings estimate revision of 6.3% for the current year over the past 60 days. Its share price increased 20.5% in the past year.

Comerica’s Zacks Consensus Estimate for the current year has been revised 12.9% upward in the last 60 days. Its shares increased 39% in the past 12 months.

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