Bank Stock Roundup: Rate Hike Expectations Instill Optimism, Wells Fargo In Focus

Banks - Major Regional Industry Price Index

Important Developments of the Week

1. Wells Fargo & Company (NYSE:WFC) announced that it will continue offering individual fee-based retirement accounts to clients. However, the company will make some adjustments in its procedures to comply with the U.S. Department of Labor’s (DOL) new fiduciary rule which is expected to come into effect from April next year. Per a memo sent by Wells Fargo, the company is likely to offer such commissions-paying accounts in a way that complies with the rule's "best interest contract exemption." Under this, firms are allowed to offer commissions-paying products, provided they give better disclosure about fees to their clients.

Additionally, after the cross-selling scandal, which has been in the news for quite a long time now, Wells Fargo decided to separate its Chairman and CEO roles. The bank announced that its Board of Directors has approved the amendments in the Company’s By-Laws.

Also, per a legislation introduced by lawmakers recently, customers at Wells Fargo will be allowed to go to the court to settle their claims about cross selling, instead of engaging in private arbitration.

2. Troubles heap on the U.S. banking giants. Wells Fargo faces a new class action lawsuit, alleging the bank of enriching itself at the cost of its employees’ retirement savings by including costly, in-house target date funds in its 401(k) plan. The plan has nearly $35 billion in assets and more than 350,000 participants, as mentioned by the plaintiff. The lawsuit accuses Wells Fargo of "self-dealing and imprudent investing" by misrouting more than $3 billion of 401(k) contributions to its Wells Fargo Dow Jones Target Date funds.

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The bank intentionally boosted its proprietary mutual funds’ assets by making its target date funds a default investment option through an "easy" and "quick" enrolment process. These funds carried fees 2.5 times more than its peers such as Fidelity Investments and Vanguard Group, and consistently underperformed them. The lawsuit seeks to recoup unrealized profits and extra fees generated from the bank’s breach of fiduciary duties to all 401(k) participants over the last six years (read more: Wells Fargo Sued by Plaintiff Over Target Date Funds ).

3. The Consumer Financial Protection Bureau (CFPB) cautioned financial companies about creating incentives programs for employees and service providers to meet aggressive internal sales goals. According to the CFPB, such goals can lead to the employees taking illegal steps, ultimately affecting customers.

Employees and service providers could violate consumer financial law through misrepresentation of benefits of the products offered to the clients, openings accounts without their consent, and steering them toward less favorable terms. Therefore, the CFPB has directed banks to take some steps to make their compliance management systems strong, in order to prevent and detect any violation of law (read more: Banks Under CFPB's Purview for Employee Incentive Programs ).

4. Following Brexit, some of London-based equity and interest-rate derivatives traders of Citigroup Inc. (NYSE:C) might be moved to Frankfurt. However, depending on negotiations between the UK and the European Union (EU), the plan might take a turnaround. Brexit might lead to the termination of the passporting rights to the UK.

Therefore, with a majority of European employees in London, Citigroup, JPMorgan Chase & Co. (NYSE:JPM) and Morgan Stanley (NYSE:MS) are planning to move their staff from London. Citigroup is in talks with the German financial regulator – BaFin – to get regulatory approvals for moving the operations (read more: Citigroup Plans to Move Derivatives Traders to Frankfurt ).

5. The regulator of securities firm in the U.S., the Financial Industry Regulatory Authority (FINRA) – has imposed a fine of $7 million on Merrill Lynch, a unit of Bank of America Corporation (NYSE:BAC) (NYSE:C) , for inadequate supervision of securities-backed leverage in their clients’ brokerage account. Merrill Lynch will pay $6.25 million in fine and around $780,000 in restitution to settle the charges.

Merrill Lynch’s clients used leverage to buy Puerto Rican municipal bonds and other securities. The regulator separately found that from Jan 2010 through Jul 2013, the company’s systems lagged in ensuring the suitability of such securities for its customers (read more: Zacks Investment Research

Written By: Zacks Investment Research