On February 2, 2018, the Fed announced that it issued a consent Cease and Desist order with Wells Fargo—the bank holding company. The Fed’s press release noted that Wells is replacing 4 directors within this year (out of 17 that signed the C&D), but this reconfiguration is not a formal requirement of the C&D. Press reports imply that the Fed was behind these changes. Of course, Wells is as closely supervised by the Fed as any bank could be; nonetheless, the Fed takes no responsibility for the errors at Wells and shows no humility in passing out blame. It is without precedent for the Fed to write personal letters to former directors (as summarized below), roundly rebuke them and then publish the letters.  

Cease and Desist Order

The Fed noted that under Regulation YY the bank had to have a firmwide risk management system and the directors were responsible for evaluating the bank’s risk management capacity. The bank pursued growth but did not have an adequate risk management framework resulting in weak compliance. 

Wells must act as a source of strength and ensure its bank subsidiary complies with the enforcement actions pending against it since 2016. The Wells’ Board has to give the Fed a written plan to enhance its supervision including matching Wells’ strategy with its risk management capacity; how the board will supervise management and dozens of actions related to risk management. 

Wells has to submit a written plan to improve compliance and operational risk including testing and validation to insure businesses follow law and then test these systems; how management will integrate all compliance measures into its business processes; measures to enhance operational risk including a well-controlled key risk indicator and a stress loss forecasting system that measures operational risks under stress and a review of policies firmwide about how to remediate customers harmed by Wells’ products or misconduct and fix any policies in this area that are deficient. 

Once these 2 plans are up and running, Wells must obtain an independent third party review of these matters. Then Wells must get a second review to assess sustainability of the changes.  If the Fed does not like these reviews, it can order additional reviews. 

Wells cannot grow its assets beyond those reported at the end of 2017 until these plans are completed and the Fed gives an approval to continue growth.  The Fed will continue to investigate whether any actions should be brought against officers of Wells and Wells agrees to give “substantial assistance” to the Fed on this score. 

Special Letter to all the Directors of Wells

On February 2, 2018, the Fed’s Director of Supervision and Regulation sent the Wells’ board a letter that advised the board that it did not meet the Fed’s supervisory expectations. The Fed instructed the board to ensure management has an effective risk management structure in place and improve reporting to the board. The Fed admonished the board for accepting management reports without action plans and the ability to track results of the plans

The board has to ensure that Wells’ incentives for employees are consistent with risk management goals and promote compliance—failures in this regard played a material part in the breakdowns in compliance. The Fed noted that the board will be “reconstituted” and the Fed will closely monitor the board itself in meeting future supervisory expectations. 

Special Letter to Stephen Sanger (retired)

Mr. Sanger was the "lead independent director" and the Fed singled him out for criticism.  The Fed said in his role he needed to get more information about the problems and make a robust inquiry. In the Fed’s view, he did not do any serious investigation or lead the other directors to press for more information. This was contrary to Wells’ internal governance guidelines. The Fed bluntly advised him that his performance is an example of ineffective oversight that is not consistent with the Fed’s expectations for Wells. Yikes.

Special Letter to Chairman Stumpf (retired)

The Fed told him that he had to ensure the business strategies approved by the board were consistent with the risk management capabilities of Wells and that the board had enough information to perform its duties. The Fed pointed out that Wells” business plans actually motivated compliance violations and the risk management programs were too weak to prevent such violations.  He was personally aware of these problems but he did not ensure that the whole board received detailed and timely reporting of these issues. Worse than that he supported the sales practices and the management responsible and even objected to efforts by the board to hold these executives responsible. As with the independent director, the Fed bluntly advised him that his performance is an example of ineffective oversight that is not consistent with the Fed’s expectations for Wells.