Advisors, watch out for William Galvin.
The hard-nosed Massachusetts secretary of the commonwealth, renowned for his close scrutiny of the advisory industry, has pounced again, this time charging Fidelity Brokerage Services in a 48-page administrative complaint with acting in "a dishonest and unethical manner."
Fidelity allowed at least 13 unregistered Massachusetts investment advisors to use its broker-dealer platform to make trades for others for at least 10 years, the complaint alleges, "thereby generating fees for both Fidelity and the unregistered advisors."
Fidelity "served as a haven from regulatory oversight as it ignored blatant unregistered investment advisory activity," according to a statement from Galvin's office.
"Fidelity, of all companies, knows full well the range of investor protection provisions resulting from regulatory oversight," said Galvin, who fined LPL Financial in July for failing to supervise the state's senior designation rule. "For them to knowingly allow unregistered activity on their broker-dealer platform is a profound failure of their regulatory obligations. "
FINE, CENSURE SOUGHT
The complaint calls for Fidelity to cease the practice, hire an independent consultant to review the matter, make recommended changes to its policies and procedures, pay an administrative fine and be censured.
"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," responded Fidelity spokesman Adam Banker. "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."
The secretary's office would not release the names of the unregistered advisers, saying they were "under investigation."
But the complaint did describe their alleged activities, which "generated trading revenue" for Fidelity, noting that registration is "at the core" of the financial giant's business.
FREE TRADES, FREQUENT FLYER MILES
Over 20 Fidelity customers paid one unregistered investment adviser $732,271.83 in advisory fees out of their Fidelity accounts over a 10-year period, during which the adviser made 12,389 trades on his own accounts and 28,958 in the accounts of his clients, according to the complaint.
During that time Fidelity encouraged the advisor's trading activity by providing the individual with gifts such as free trades, airline frequent flyer miles and tickets to a professional sporting event, the complaint charges.
Only after more than a decade of the advisor "openly flaunting" Fidelity's regulatory requirements did the firm to conduct a risk assessment for unregistered activity and finally revoke the advisor’s trading authorizations, according to the complaint.
The advisor's activities were "emblematic of systemic failure to detect and prevent unregistered activity," the complaint concluded.
Earlier this year, Galvin's office charged Securities America with failure to supervise ads aimed at seniors and settled a failure to supervise charge with Merrill Lynch for $2.5 million.
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