Say it ain't so, Fido.

Regulators may have found a chink in the armor of the world's largest mutual fund company, as Fidelity Investments faces an enforcement investigation over whether its traders received lavish gifts and special favors from brokerages as incentives to trade with them.

The Securities and Exchange Commission and NASD have launched separate probes into gift and entertainment practices on Wall Street, a move that has placed the reputable Boston-based fund giant in their cross hairs. The two agencies have subpoenaed roughly two dozen companies that may have doled out improper gifts to fund employees, including junkets to Las Vegas on private jets, expensive wine, Super Bowl tickets and foursomes at upscale golf courses.

The NASD prohibits any employee of a member firm from giving a business associate a gift exceeding $100 in value over the course of a year. That rule does not apply to client dinners and other forms of standard business entertainment, but, rather, egregious spending on big-ticket items.

"Excessive gifts are basically bribes," said James Angel, an associate professor of finance at Georgetown University in Washington. "Those bribes are paid for by the end investor, the mutual fund shareholder." Angel believes an investigation of gifting practices in the financial services industry is long overdue but acknowledged it is a problem that will probably never go away. That's because financial markets have so much money in them that there will always be temptation for people to break the rules or push the envelope on what is accepted, he said.

Red flags went up at Fidelity last month after a broker, Kevin Quinn of Jefferies & Co., was fired for showering a handful of Fidelity traders with such luxurious gifts. The names of two Fidelity traders, in particular, are said to have appeared on Quinn's travel and expense reports repeatedly, prompting Fidelity to conduct an internal investigation of its trading unit. In at least two instances, the pair of Fidelity traders reimbursed Quinn for a portion of the expenses incurred, while Quinn had already hit up Jefferies for the very same expenses.

As a result, the SEC sent subpoenas to a number of brokerage firms requesting records of their entertainment budgets for Fidelity along with employee expense reimbursement and related documents. At issue is whether these gifts skewed the brokerage selection process and compromised the fund manager's fiduciary duty to achieve best execution for its shareholders.

"We're concerned about any conflict of interest that could distract a mutual fund trader from his obligation to consider the interests of fund investors first and foremost," said Lori Richards, director of the SEC's office of compliance, inspections and examinations, earlier this month. The SEC would not comment on the details of its investigation.

The news comes as a surprise, given Fidelity's reputation as being one of the more investor-friendly shops and the fact that it has managed to emerge unscathed thus far from the massive trading scandal that has roiled the $7.5 trillion industry. Indeed, Fidelity has lower fund management fees than a large majority of its competitors because it has worked to keep its trading costs low, much to the dismay of many Wall Street firms looking to reap greater profits.

The NASD is currently looking into golf outings Bank of America provided to Fidelity's head of equity trading, Scott De Sano, MME has learned. In what appears to be part of BoA's efforts to win trading business from Fidelity over the past few years, the bank sponsored De Sano in the annual AT&T Pebble Beach National Pro-Am golf tournament several times.

The invitation-only event raises money for charity and allows executives to pair up with pro golfers such as Vijay Singh. De Sano, an experienced linksman, was paired with pro Casey Martin, who led them to a very respectable score of 261 for four rounds, according to standings posted on the tournament Web site. Legendary PIMCO bond fund manager Bill Gross also participated in the event.

De Sano reportedly received permission to attend the golf outing provided that he paid his own travel expenses. However, De Sano did not reimburse BoA for his spot in the tourney. The greens fee alone for the tournament is $9,500, according to a spokesman for the tournament. Firms often purchase hospitality packages for their guests, which include VIP passes and a chalet along the fairway. These packages vary in price but can cost up to $150,000, the spokesman said. It's no secret that tee times in ritzy country clubs and resort areas are used as bargaining chips in the high stakes game of attracting assets. The question is, where do you draw the line?

"It is one thing to play golf with a customer," Angel said. "It's an entirely different thing altogether to fly a customer to a golf resort on a tropical island in February with various forms of exotic entertainment in the hotel room later."

Determining what constitutes appropriate expenditures is not always so cut and dried because there is some overlap between gifting and entertaining. The SEC plans to look at how well informed Fidelity employees are regarding the company's gift policy and pinpointing who is responsible for their training and supervision, according to a source familiar with the matter. For its part, Fidelity's policy states that it does not accept gifts or other forms of compensation designed to influence a fund's investment decisions or trading activity. It also bars employees from accepting any gift from a vendor worth more than $100 in a calendar year.

"Our policies and procedures are monitored closely for compliance," said Anne Crowley, a spokeswoman for Fidelity. "If we find any violations of our policies and procedures, we have a process in place that ensures that we would take disciplinary action against the employees up to and including dismissal." She declined comment, however, on whether Fidelity traders steered business to favored brokers.

On top of the alleged gift-giving abuses, Fidelity is also under investigation for allegedly steering business to relatives that work at brokerage firms that execute Fidelity trades. A recent Boston Globe report called into question the relationship between Fidelity trader David Donovan and his brother Peter Donovan, who handles Fidelity transactions at Banc of America Securities in Boston. Considered one of Fidelity's elite traders, David conducted business directly with his younger brother, among others at Banc of America Securities, according to the report.

While it isn't against the rules for a trader to do business with a relative, regulators are concerned that shareholders may not have received the best deals on stock trades because traders were funneling business to relatives or close friends who responded in kind with an expensive gift. Fidelity does not prohibit employees from doing business with family members but its code of ethics stipulates that employees must not place their own interest or the interest of a third-party provider ahead of the interests of mutual fund shareholders.

By law, fund companies are obligated to seek the best price for their shareholders. Regulators are trying to determine whether the Fidelity traders put investors' best interests on the back burner by steering business to brokers who bucked up for the best gifts or entertainment, or to family members, rather than to those firms who offered the best execution at the best price.

Chastened by the experience of the go-go 90's, when markets were roaring and its staff was asleep at the switch, the SEC is no longer looking the other way. So, when the biggest mutual fund firm exhibits some questionable behavior, regulators have to check it out.

"Clearly, Fidelity is one of the biggest mutual fund service companies in America. To a certain extent, with many of our retirement savings invested there, they've got to be above reproach," Angel said.

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