Massachusetts Secretary of the Commonwealth Matthew Francis Galvin says his office is commencing an adjudicatory proceeding against Fidelity Brokerage Services LLC, under the authority of the Registration, Inspections, Compliance and Examinations (RICE) Section of the Massachusetts Securities Division of the Office of the Secretary of the Commonwealth.
According to a complaint filed by Secretary Galvin, Fidelity is accused of acting in “a dishonest and unethical manner” in breaching its “obligation to observe high standards of commercial honor and just and equitable principles of trade in the conduct of its business.” Specifically, Fidelity is accused of “knowingly allowing unregistered investment advisers to utilize Fidelity’s trading platform to conduct unregistered activity in Fidelity customer accounts, including the accounts of Massachusetts residents, and facilitating the transfer of funds from Fidelity customer accounts to compensate unregistered investment advisers for providing investment advisory services.”
Fidelity is thus accused of violating parts of Chapter 11 of the Massachusetts Uniform Securities Act, Galvin notes.
The RICE Section seeks an order “finding as fact” the allegations it sets out, censuring Fidelity and requiring the firm “to permanently cease and desist from further dishonest and unethical conduct that allowed unregistered investment advisers to utilize the Fidelity trading platform to conduct unregistered investment advisory activity in the Commonwealth and to be compensated from Fidelity customer accounts for providing unregistered investment advisory services.”
The state regulator is also seeking to levy fines against Fidelity for specific breaches, and for Fidelity to be required “to engage an independent compliance consultant to review written policies and procedures regarding trading authorizations and ensuring that such policies include methods for enforcement and compliance oversight.”
According to the Massachusetts Secretary, “for at least 10 years, Fidelity Brokerage Services LLC, as registered broker/dealer, has knowingly allowed its retail customers to be advised by least 13 unregistered Massachusetts investment advisers, serving as a haven from regulatory oversight by ignoring blatant unregistered investment advisory activity.”
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As such, the regulator accuses Fidelity of 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 … But for Fidelity allowing their trading platform to be utilized, the unregistered investment advisers would have had no business. By allowing unregistered advisory activity, Fidelity put its own retail customers at risk and undeniably weakened the protections afforded to those retail customers through the Division's oversight of investment advisers who register with the Commonwealth.”
A play-by-play of the allegations is available in the text of the complaint, but at a high level Fidelity is accused of allowing unregistered individuals to use the Fidelity brokerage system to operate trading and advisory businesses that were not properly licensed or adhering to required registration practices.
For example, one individual, referred to as “Unregistered IA 1,” apparently commenced advisory activity “around January 2005, when two individuals submitted trading authorization forms to Fidelity allowing Unregistered IA 1 unlimited trading ability on their Fidelity customer accounts. Over approximately the next 10 years, the trading authorizations submitted by 20 additional Fidelity customers repeatedly indicated Unregistered IA 1's relationship to the Fidelity customer as the customer's ‘financial adviser,’ listing Unregistered IA 1's employment as ‘self-employed’ and his occupation as ‘financial adviser.’ Those forms, which were unambiguous and also permitted Fidelity to conduct background checks on Unregistered IA 1, were ignored by Fidelity as Unregistered IA 1 conducted his openly unregistered advisory activity.”
The state regulator says Unregistered IA 1's unregistered activity “was so blatant that on three separate occasions, twice in 2006 and once in 2014, Fidelity instructed him to register.”
“Despite its demonstrated knowledge of unregistered activity, Fidelity continued to allow Unregistered IA 1 to advise Fidelity customer accounts,” the complaint says. “Over the approximate 10-year timeframe, seven Fidelity customers serviced by Unregistered IA 1 paid Unregistered IA 1 a total of $732,271.83 in advisory fees from their Fidelity customer accounts. The majority of these disbursements noted that the payment to Unregistered IA 1 was for advisory fees.”
Fidelity shared the following comment with PLANADVISER: "We can assure you that we take very seriously the trust investors place with us and out obligation to manage our business in accordance with all relevant laws and financial industry regulation. We do not believe that Fidelity has violated any laws or regulations in connection with this matter. We look forward to reviewing the details of this matter and addressing them appropriately."