Secretary of the Commonwealth William F. Galvin (Photo courtesy of Wikipedia.org)
BOSTON – Fidelity Investments illegally let dozens of unregistered advisers trade in customer accounts through its brokerage unit for at least a decade, gaining client assets and fee income while putting customers at risk, Massachusetts regulators claim in a complaint brought against the mutual-fund giant on Monday.
According to an administrative complaint filed by lawyers for the securities division of Secretary of State William Galvin’s office, Boston-based Fidelity allowed unregistered advisers to have access to client funds, thereby exposing its clients to unnecessary risks. The filing makes no mention of any customer losses, however, and acknowledges that the trading was authorized by the clients.
“By allowing unregistered advisory activity, Fidelity put its own retail customers at risk,” the complaint claims. It accuses Fidelity of knowingly acting as a haven for unregistered advisers and collecting fees from their activities using client funds. It says in many cases the advisers opened new accounts with Fidelity, using client funds, to enable trading through the company’s brokerage service, often at reduced commissions.
“We do not believe that Fidelity has violated any laws or regulations in connection with this matter,” spokesman Vincent Loporchio said by email. “We look forward to reviewing the details of this matter and addressing them appropriately.”
In one case cited in the complaint, an unnamed Massachusetts resident described as a former investment banker controlled trading in more than a dozen Fidelity customer accounts with more than $9 million in assets. The complaint says that even though people at Fidelity knew the adviser wasn’t properly registered with Galvin’s office or at a national level, the company allowed him to trade in client accounts and provided him with perks in the form of free trades, tickets to a Bruins hockey game and mileage credit on a major airline. The complaint doesn’t name any of the unregistered advisers it says were identified either by regulators or Fidelity itself.
State law requires investment advisers who are paid a fee by clients to be registered. Registered investment advisers must follow rules that put customer interests ahead of their own, and provide regulators with access to their records, the complaint says. It points out that the adviser with trading authority over $9 million in customer assets made more than 12,000 trades in his own account and almost 30,000 in his clients’ accounts. Because of the collective size of the assets involved, the adviser was given discounts on trading fees that at least some of his clients would not have qualified to receive, the complaint says.
Even though Fidelity employees instructed the adviser to register more than once, in 2006 and 2014, he didn’t and yet was allowed to continue trading in client accounts, the regulators say. Over 10 years, the adviser collected about $732,000 from just seven clients, through fees he withdrew from their Fidelity accounts, with the clients’ authorization, the complaint says. It said the unidentified man finally applied to register as an adviser in May 2015.
In July 2014, Fidelity began to reassess the risks involved in letting unregistered advisers trade in client accounts, the complaint says, asserting that that evaluation was accelerated because of the state investigation of the practice. The complaint says 93 more unregistered advisers in Massachusetts, each with authorizations to trade in at least 15 accounts, were identified by Fidelity’s review, and since January, 13 have had their trading authorizations revoked, including the example cited above.
“Fidelity’s willful ignorance and failure to detect and prevent unregistered activity has left Massachusetts individual investors, and Fidelity’s own customers, at risk and constitutes a clear case of dishonest and unethical behavior,” the state claims. It seeks an unspecified amount in fines and the imposition of an independent compliance consultant to ensure it follows the appropriate rules with respect to investment advisers.
Fidelity serves more than 24 million individual investors with over $5.2 trillion in assets, according to its website. The company’s brokerage platform executes more than 445,000 trades each day through almost 22 million accounts, it says.
“We can assure you 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,” Loporchio said.
Secretary of the Commonwealth William F. Galvin (Photo courtesy of Wikipedia.org) 
