Articles Posted in Fidelity

Massachusetts’ Securities Regulator Says Fidelity Brokerage Services “Rubber Stamped” Options Trading Applications

William Galvin, head of the Massachusetts Securities Division, has filed an administrative complaint against Fidelity Brokerage Services. The firm has been accused of not making a good enough attempt to vet investors’ applications before allowing them to engage in options and margin trading. This led to financial losses for investors.

The state regulator accused the broker-dealer of having a “halfhearted and lackadaisical attitude” when it came to protecting retail investors. Fidelity Brokerage Services failed to reasonably perform due diligence related to approving customers’ accounts—a violation of Massachusetts securities laws. Fidelity Brokerage Services is a subsidiary of Boston-based Fidelity Investments.

Nearly years after settling two 401K lawsuits for $12 million, participants in Fidelity Investments’ retirement plan are once more suing the firm. The plaintiffs allege that self-dealing cost them money while allowing the financial firm and a number of its affiliated entities to turn a profit.

According to the complaint in Moitoso et al v. FMR LLC et al, Fidelity breached its fiduciary obligation to plan participants by including too many proprietary mutual funds in its $15B 401(K) plan. The plaintiffs claim that compared to 2014 and 2015, there was an increase in in-house funds in the 401(k) plan in 2016: 234 proprietary mutual funds with no non-proprietary funds in the plan, whatsoever.

Fidelity is accused of choosing proprietary investment products to promote its own interests even if they may not have been suitable for plan participants. As a result, contend plaintiffs, compared to the typical 401(k) plan, plan participants have lost $100M more annually because of poor performance and costly fund fees.

The US Securities and Exchange Commission has filed civil charges against Ameriprise Financial Services (AMP). The regulator is accusing the brokerage firm and investment adviser of recommending to retail retirement account customers that they purchase mutual fund shares that charged higher fees. Ameriprise purportedly failed to employ sales charge waivers when applicable.

The Commission’s order contends that the broker-dealer neglected to determine when certain retirement account customers qualified for mutual fund share classes that were not as costly.

Instead, the firm would recommend and sell the more costly mutual fund shares even when the less pricey options were available. Ameriprise is accused of not letting these customers know that the firm would make more from the costly mutual fund shares even as their overall investment returns were harmed.

The SEC said that about 1,971 customer accounts paid nearly $1.8M in up-front sales fees that were not warranted, costlier ongoing fees, “contingent deferred sales charges,” and other expenses because of the way that Ameriprise handled the recommendation and sale of mutual funds to retirement account clients.

The firm is cooperating with the regulator and has paid back customers that were affected with interest. Retirement account customers eligible for the less expensive mutual fund share classes have been moved to those classes free of charge.

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The Financial Industry Regulatory Authority (FINRA) has imposed an over $1 million penalty on Fidelity Investment’s Fidelity Brokerage Services (Fidelity) for failing to protect clients from a financial fraud committed by a woman pretending to be a broker for the firm. Lisa A. Lewis (Lewis) stole over $1 million from customers, most of whom were elderly investors. FINRA says that the firm’s retail brokerage arm should have been able to detect the scam, but Lewis was able to perpetrate her fraud because Fidelity’s supervisory controls were lax.

According to the self-regulatory organization (SRO), from August 2006 to May 2013, Lewis told customers from a firm she was fired from for purported check-kiting and improperly borrowing customer funds that she was with Fidelity, when she had no such connection to the firm. Lewis set up Fidelity accounts by using the personal data of nine people and placed the accounts in their name, as well as established joint accounts with them in which she named herself co-owner. Lewis then had all communication regarding the accounts sent to her. Lewis was able to set up over 50 individual and joint accounts at the firm. She proceeded to convert assets from these accounts for her own benefit.

Last year, Lewis pleaded guilty to wire fraud related to the elder financial fraud scam, and she is now behind bars where she is serving a 15-year prison term. She also has to pay over $2 million in restitution to the customers she harmed.
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Commonwealth William Galvin has filed an administrative complaint against Fidelity Brokerage Services. The firm is accused of letting at least 13 unregistered investment advisers trade on its broker-dealer platform, which caused Fidelity and the advisers to earn fees.

This practice, which involved unregistered advisers having their clients turn in trade authorizations to the brokerage firm so that they could access the accounts, purportedly took place for more than ten years beginning in 2005. For example, the state regulator contends that over twenty Fidelity customers paid one unregistered investment adviser $732,000 in fees over ten years in which he made over 12,000 trades in his account and nearly 29,000 trades in client accounts.

Galvin believes that Fidelity knew that this person was acting as an unregistered adviser, even at one point pressing him to register. However, claims the regulator, despite remaining unregistered, the trader was rewarded because of referrals he made to the broker-dealer. Seven Fidelity customers paid him $732,000 as compensation for his services.
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The Financial Industry Regulatory Authority says that Fidelity Investments must pay $350,000 for overcharging thousands of clients $2.4 million for transactions involving fee-based accounts in its Institutional Wealth Services Group. The overcharges are said to have occurred from 1/06 to 9/13. The group offers brokerage and trading services to investment advisers and their clients.

According to the self-regulatory organization, the inappropriate charges happened because of a supervisory oversight involving the way that Fidelity applies fees under its asset-based pricing model. The model typically charges according to assets, not transactions.

FINRA says that until 2013, the financial firm did not have a designated supervisory principal to oversee the group’s asset-based pricing program. As a result, a number of clients may have been charged excess commissions beyond the asset-based management fee or were double billed.

Fidelity Investments has consented to pay $12 million to settle two class action employee lawsuits. The plaintiffs contend that the retirement plan provider was self-dealing in the FMR LLC Profit Sharing Plan and making money at their expense by offering employees high-cost fund options and making them pay excessive fees.

Over 50,000 ex- and present employees are eligible to receive from the settlement. Fidelity is accused of providing just its own funds in the retirement plan for its workers, with certain investment options having little (if any) track record, while failing to use an impartial process when choosing the investment options.

As part of the agreement, Fidelity Investments will now give employees a choice of non-Fidelity and Fidelity mutual funds, increase auto-enrollment to 7%, and allow participants of non-Fidelity mutual funds to benefit from revenue sharing, just like the participants of Fidelity mutual funds and collective trusts. The company also will keep offering a default investment alternative, the Fidelity Freedom Funds-Class. The Portfolio Advisory Services at Work program will be provided for free.

While regulators continue pondering whether to impose more regulations on money market mutual funds, a number of financial institutions, including Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM), Fidelity Investments, BlackRock Inc. (BLK), Bank of New York Mellon Corp. (BK), Federated Investors Inc. (FII), and Charles Schwab Corp.,(SCHW), started disclosing the market-based net asset values of these funds last month. Reasons given for these disclosures included offering greater transparency and giving investors more information about the market. However, some believe there are firms are issuing these disclosures because that is what their competitors are doing.

Currently, money market funds have a $1/share stable net asset value for all investor transactions. The underlying assets of the funds, which are debt securities with high ratings, however, can undergo periodic, small value changes that may slightly affect a fund’s per share market value. This is also called the shadow price, which are reasonable estimates/fair valuations of the price that an instrument could be sold at in a current trade.

A few years ago, the Securities and Exchange Commission approved modifications to its Rule 2a-7 and other rules about money market funds mandating that managers of the funds reveal changes to portfolio holdings and give the regulator the market-based net asset values of the funds. Fund information for each month has to be given to the SEC at a succeeding month. The Commission then makes the information available to the public 60 days after the month to which the data pertains has concluded. These Daily disclosures would make the data more immediate (and relevant) for investors.

A number of Fidelity Brokerage Services LLC representatives who left the company last year say that they were obligated to acquire certified financial planner certification but were also barred from revealing that part of their bonuses were affected by whether they sold certain proprietary products. About half of Fidelity brokers’ compensation is salary and the remainder is in bonuses. The ex-brokers say they were pressured into selling Fidelity’s life insurance products and Portfolio Advisory Services.

One ex-broker said that he had to meet 80% of his sales target in PAS in order to qualify for the investment portion of the manager bonus and not receive an employment warning. Other brokers say that they were monitored weekly and comparisons were made between them and other representatives to spur productivity. Still another ex-broker said they were warned that representatives who didn’t get the CFP by mid-2009 would be let go.

The Fidelity Investments brokerage unit removed the CFP mandate this January, the same month that that the Certified Financial Planner Board of Standards Inc. instituted a new code of ethics and professional responsibility that obligates certified planners to notify clients about any conflicts of interest. A number of ex-Fidelity brokers says that Fidelity Brokerage withdrew the requirement because approximately 18% of the more than 275 account executives with its Private Client Group resigned last year.

Fidelity disputes the former brokers’ accounts and says that attrition isn’t unusual, broker compensation doesn’t conflict with clients’ best interests, and bonuses are not affected by proprietary products’ sales. A company spokesperson also says that the CFP requirement was withdrawn so that qualified candidates wouldn’t be discouraged from joining the private-client unit and the decision had no connection to service offering. Fidelity says it still encourages representatives to get the CFP.

Related Web Resources:
Ex-Fidelity reps claim sales pressure, Investment News, April 5, 2009
Certified Financial Planner Board of Standards Inc.
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Fidelity Investments has agreed to pay an $8 million fine to settle Securities and Exchange Commission charges that the company failed to properly supervise its stock traders that had improperly received gifts. 13 current and ex-Fidelity employees are targeted in the SEC investigation.

The gifts were given to traders by outside brokers who were soliciting Fidelity’s business. Fidelity has had a policy that prohibits employees from engaging in business transactions influenced by gifts received. Employees are also not allowed to receive gifts valued at more $100 over a one-year period.

The SEC alleges that accepting the gifts affected the Fidelity traders’ ability to obtain the best stock trades for Fidelity’s mutual fund customers.

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