Massachusetts’ top securities regulator, William Galvin, on Monday charged Fidelity Brokerage LLC of Boston with “dishonest and unethical behavior” for allowing at least 13 unregistered investment advisors to make trades for others through the Fidelity broker-dealer platform, generating fees for Fidelity and the advisors.
In its administrative complaint, the Massachusetts Securities Division charged Fidelity with serving as a “haven from regulatory oversight” for at least 13 unregistered Massachusetts advisors, and also charges Fidelity with breaching “its duty to act honestly and ethically” and breaching “its obligations to observe high standards of commercial honor and just and equitable principles of trade in the conduct of its business.”
Said Galvin in a statement announcing the complaint: “Fidelity, of all companies, knows full well the range of investor protection provisions resulting from regulatory oversight. For them to knowingly allow unregistered activity on their broker-dealer platform is a profound failure of their regulatory obligations.”
The complaint requires Fidelity to cease the practice, to hire an independent consultant to review the matter and make recommended changes to Fidelity’s policies and procedures, to pay an administrative fine and to be censured.
According to the complaint, while Fidelity had policies in place since 2011 that specified “red flag risk warnings” for certain levels of third-party trading, “these were ignored until recently when a total of thirteen individuals were terminated for unregistered activity this year, which coincided with the Securities Division’s investigation.”
In one instance, the complaint states, more than 20 Fidelity customers paid one unregistered advisor who was trading on their behalf $732,271.83 in advisory fees.
The advisory fees were paid out of their Fidelity accounts over a 10-year period. In that time, the investment advisor made 12,389 trades on his own accounts and 28,958 in the accounts of his clients for which he held trading authority.
The complaint alleges that Fidelity “had knowledge” that the individual was acting as an advisor during that entire period and encouraged his trading activity by providing the individual with gifts such as free trades, airline frequent flyer miles and tickets to a professional sporting event.
Only after a period of some 10 years was the advisor’s trading authorization revoked for acting in an unregistered capacity, the complaint states.
Fidelity said in a statement that “we take very seriously the trust investors place with us and our obligation to manage our business in accordance with all relevant laws and financial industry regulation,” adding that Fidelity does not believe that it “has violated any laws or regulations in connection with this matter.”
Fidelity also said in the statement that “We look forward to reviewing the details of this matter and addressing them appropriately.”
— Check out Massachusetts Regulator Investigating BNY Mellon Tech Glitch on ThinkAdvisor.