By Gretchen Morgenson and Emily Glazer

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 1,600 participants.

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 trustee.

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 statement said.

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 comment.

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 pension fund.

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 overcharges.”

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 review.

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.'