WALL STREET JOURNAL.
Wells Fargo Improperly Kept a Pension Fund’s Fee Rebates
Bank says it didn’t
pass on rebates of mutual-fund fees because of ‘a system set-up
The improper retention of client
fee rebates by Wells Fargo occurred in a complex but common
set-up known as revenue sharing. PHOTO: MATT ROURKE/ASSOCIATED
Gretchen Morgenson and
May 9, 2018 7:29 p.m. ET
Wells Fargo & Co. has
acknowledged that it pocketed fee rebates that should have been passed
on to a public pension fund in Tennessee while acting as its trustee,
according to correspondence between the fund and the bank reviewed by
The Wall Street Journal.
The bank owned up to the problem in late April after the
Chattanooga Fire & Police Pension Fund had spent months questioning Wells Fargo
officials about fee practices in its institutional retirement and trust unit,
according to the correspondence. The bank said in the correspondence that the
improperly retained fee rebates resulted from “a system set-up error.”
In a statement for this article, the board of the Chattanooga
pension fund said it was concerned that other trust and fiduciary accounts
overseen by Wells Fargo may have been “similarly harmed.”
“For the last 9 months the Board of Directors of the Fire and
Police Pension Fund of Chattanooga has been investigating potential fraud and
overcharging by Wells, its trustee, in connection with compensation paid by
mutual funds to Wells,” the statement said.
Since 2010, the pension fund said, Wells Fargo has improperly
retained $47,000 belonging to the fund, which holds $215 million in assets for
The improper retention of fee rebates by Wells Fargo occurred in
a complex but common set-up known as revenue sharing. Under such arrangements,
the bank received fee rebates from mutual-fund companies related to investments
it held for clients. The bank was then supposed to return the rebates to those
clients. Instead of crediting the rebates back to the Tennessee pension fund,
Wells Fargo kept them.
The bank recently told the pension fund that the system problem
had been corrected. Wells Fargo says the fees retained by the bank amounted to
only $15,000. It declined to comment on whether other clients were affected.
“We acknowledge that because there was a change directed by the
client in 2017, we made an error in setting up the revenue sharing associated
with that change appropriately and the revenue sharing rebates did not occur as
intended,” a Wells Fargo spokeswoman said in a statement for this article. “The
issue was fixed and the total revenue share received from the third party fund
companies (approximately $15,000) was returned to the pension fund.”
The pension fund said it has decided to fire Wells Fargo as
The fund’s board said in its statement: “Wells’s answers have
changed over time revealing ever-greater amounts of undisclosed revenue sharing,
systemic errors and incomplete records. The Board has lost confidence that the
answers provided by Wells to date are complete.”
On Tuesday, the fund filed a whistleblower complaint with the
Securities and Exchange Commission and the Commodity Futures Trading Commission
outlining the bank’s alleged improprieties. It also filed a complaint in
Tennessee state court asking for a full accounting from Wells Fargo of any
compensation it has received from third parties during its years as trustee of
the fund. As trustee, the bank has a fiduciary duty to the pension fund, which
means it is required to act in the best interest of its client.
“We have been committed to resolving this matter and are
disappointed they felt the need to file a complaint requesting information we
have provided and are very willing to provide,” the Wells Fargo spokeswoman’s
The bank is struggling to turn the page after a spate of
improprieties that have come to light in recent years. Wells Fargo has been
experiencing problems within its wealth and investment management unit, which
includes the trust division, and several regulators have been probing practices
in the overall unit, the Journal has reported. Wells Fargo has declined to
Wells Fargo’s institutional retirement and trust division
provides record-keeping, trustee, and custody services to clients, including
401(k) accounts and pensions. At the end of March, the bank said its wealth and
retirement businesses managed $183 billion in client assets.
Wells Fargo has acted as trustee for the Chattanooga pension
since 2005. It is unclear what, if any, fees the bank may have retained between
2005 and 2010 because Wells Fargo told the fund it no longer has records for
those years, according to the correspondence.
Based on the fund’s holdings, improperly retained fee rebates
could reach almost $2 million over the 12 years Wells has been trustee, said
Edward Siedle, a former SEC attorney who conducted the investigation for the
When the Chattanooga pension fund began asking Wells Fargo about
its revenue-sharing arrangements with mutual funds, the bank said the details
were confidential, the fund told the Journal. After being challenged on this,
Wells Fargo said it had received no compensation from mutual funds held in the
pension fund’s account, the fund added.
A month later the bank reversed course, saying it had received
almost $5,000 in revenue-sharing payments on a Wells Fargo money-market fund the
pension fund was invested in between late 2010 and mid-2016, fund officials
said. That figure soon grew, the fund said.
Although Wells Fargo’s trust division hasn’t been a focus of
regulatory scrutiny, the bank alluded to problems in the business in its most
recent regulatory filing. The bank said it was “reviewing fee calculations
within certain fiduciary and custody accounts,” and had identified “instances of
incorrect fees being applied to certain assets and accounts, resulting in
In mid-April, Adam Taback, Wells Fargo’s private bank deputy
chief investment officer, told a group of around 20 wealth-management employees
that system errors may have resulted in erroneous charges, according to a bank
employee familiar with the discussion. Fees were either too high or too low
among a number of clients selecting investments from the bank’s Investment and
Fiduciary Services platform, the employee recounted Mr. Taback saying.
Mr. Taback, who also serves as head of Wells Fargo’s global
alternative investments group, didn’t indicate how many clients were affected,
according to the employee. But a former Wells Fargo executive said these types
of system “error glitches” occurred frequently at Wells Fargo. This person said
the errors in fee collection typically weren’t large in scope for each client
and ranged around 1% of client’s assets.
Mr. Taback didn’t respond to requests for comment.
Wells Fargo has been working to integrate and update
certain wealth-management platforms, some of which may be responsible for system
errors, according to a 2016 internal bank presentation reviewed by the
Journal. Wells Fargo also disclosed in a March securities filing that the bank’s
sales of “alternative investments” to wealth-management clients are under
In March, the bank revised a form for these clients spelling out
potential conflicts of interest inherent in the sales with nine bullet points
explaining how it may make money, such as on administration, evaluating fund
performance or facilitating redemptions, according to a document reviewed by the
Journal. The bank also will now send clients a new memo when funds are added to
an account, including a description of fees and expenses, the document shows.
Appeared in the May 10, 2018,
print edition as 'Wells Kept Client’s Fund Fee Rebates.'