Complaint cites use of unregistered agents
JESSICA RINALDI/GLOBE STAFF
Massachusetts Secretary of State William F. Galvin has charged Fidelity Investments with unethical behavior for allegedly allowing unregistered investment advisers to use its online brokerage platform for a decade.
Galvin, whose office regulates the securities business, said Fidelity Brokerage Services “served as a haven from regulatory oversight,’’ allegedly ignoring red flags and rewarding at least 13 unlicensed advisers for bringing millions of dollars in business to the firm.
According to the state’s complaint, one adviser received $732,271 in fees by trading for more than 20 Fidelity customers between 2005 and 2015. During that period, the adviser allegedly made 12,389 trades for his own accounts and 28,958 trades for clients.
The complaint alleges that Fidelity knew the individual was acting as an investment adviser and “encouraged his trading activity” by providing the person with gifts, such as free trade, airlines frequent-flyer miles, and tickets to a professional sporting event.
E-mail records cited in the complaint showed Fidelity employees encouraging at least one of the advisers to formally register with the state. But only last summer, after a decade, did Fidelity revoke the adviser’s trading access, Galvin alleged.
A Fidelity spokesman said officials there did not believe the company had violated any laws and would review the matter. “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,” said Adam Banker, the spokesman.
Boston-based Fidelity is one of the country’s largest managers of retirement funds and other investment accounts, with $2.1 trillion under its watch. Its brokerage allows people to buy and sell stocks, bonds, and other securities online, or assign a broker or adviser to trade on their behalf.
But to be a registered investment adviser in Massachusetts requires taking certain official securities exams and applying to the state for a license.
Galvin, in an interview, said, “Why would an entity like Fidelity that prides itself on its reputation allow something like this to go on?”
It’s rare for the state to pursue Fidelity, where many customers deal directly with the firm, rather than through a broker. John Bonnanzio, editor of the independent Fidelity Insight investor newsletter, said some informal advisers may have found a way to sidestep registering with the state by starting small and making trades for family members through Fidelity or other similar platforms. But he found it surprising that these advisers had eluded Fidelity’s system checks.
“That’s fairly extraordinary to me,’’ Bonnanzio said, particularly given Fidelity’s record of complaining about too much regulation. “You would think they would have been far more careful about this sort of thing.”
The state’s investigation started in May, when it sent subpoenas to Fidelity for information. Galvin said his office is still investigating the individual advisers involved. All 13 unregistered advisers have been removed from Fidelity’s trading platform. One had permission to make trades for 99 clients.
The complaint calls for Fidelity to hire an independent consultant to change its policies and procedures, and pay an administrative fine.
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