Fidelity Brokerage Services Failed to Vet Investors

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.

Our broker-dealer negligence lawyers are looking into claims of losses by Fidelity customers who may have been unsuitably approved to participate in options and margin trading. Contact us at Shepherd Smith Edwards and Kantas (SSEK Law Firm at investorlawyers.com) today.

Supervisory Deficiencies, Improper Reviews, and Inadequate Training Alleged

According to Galvin’s complaint, Fidelity’s application review system for options and margin trading let customers turn in multiple applications. This allowed them to modify information until they were approved. For example, one customer applied 13 times in a month, providing inflated financials (among other changed details) that reviewers at the broker-dealer failed to detect.

Because of Fidelity Brokerage Service’s allegedly inadequate supervisory compliance policies and lack of safeguarding, the brokerage firm exposed retail customers to the hazards involving options and margin trading. This posed a threat not just to these investors’ financial health but also to the securities markets.

This is especially important considering that the broker-dealer experienced an “explosive growth” in its business in 2021. The complaint noted that as of September 30, 2021, Fidelity Brokerage Services had 30.9 million retail brokerage accounts. This was 22% higher than during the third quarter of 2020.

The broker-dealer has about 50 agents tasked with reviewing options and margin applications. Galvin accused the firm of failing to do even the most basic review of customer information, not reasonably training its agents, and neglecting to monitor and enforce its own policies to make sure they complied with Massachusetts securities regulations.

From July 2016 to the second half of 2021, Fidelity Brokerage Services had a provision advising options application reviewers to watch out for customers who repeatedly reapplied for options approval and modified the details of their investing experience or financials until they were approved. Galvin contends that this provision was not enforced.

Options and Margin Trading

Trading on margin can be complex and risky, as can options trading. For inexperienced investors, especially those that lack the financial and risk tolerance levels to participate in complex investing, the losses can be significant.

Often involving highly leveraged investments, options trading provides the chance of high returns. But also, it provides the risk of great losses especially when volatility arises. With smartphones making it easier to trade in the securities market, many retail investors are trying to get involved in options trading while not fully comprehending the risks.

Securities lawyer Sam Edwards of SSEK Law Firm talks about margin trading:

William Galvin wants Fidelity Brokerage Services to pay a civil fine, retain an independent compliance consultant, and avoid making these same violations in the future.

Savvy Securities Fraud Law Firm

SSEK Law Firm has represented thousands of investors against brokerage firms, and we have recovered many millions of dollars on their behalf. Contact our securities fraud attorneys at (800) 259-9010 today for your free, no-obligation case consultation.