Fidelity to Repay $42 Million in Gift Probe

As a result of an internal probe, Fidelity Investments agreed to repay $42 million, plus interest, to funds whose traders and portfolio managers steered trades to a brokerage firm that lavished them with gifts. A final settlement, however, with the Securities and Exchange Commission is still pending.

The company issued a statement on its website that an internal investigation by its independent trustees failed to discover any that the trades resulted in higher commissions. In fact, Fidelity said, “The industry’s largest benchmarking consulting firm has established that Fidelity has consistently achieved superior trade execution for its fund shareholders.” Due to technological investments and changes to its trading desk, the firm said, it reduced trading costs by $1.5 billion during the 2002-2004 period when the gifts were made.

Earlier this month, the brokerage firm, Jefferies & Co., agreed to pay $9.7 to settle charges by the SEC and the NASD that it gave $2 million worth of gifts to the Fidelity traders.

Fidelity was wise to have its independent trustees conduct an internal review and to voluntarily repay the money to its funds, for that could pave the way for a smoother—if not smaller—final settlement from the SEC, attorneys told the Boston Globe. In fact, they said, it might mark the beginning of more collaborative oversight of the industry.

The payment “takes the wind out of [the SEC’s] sails,” said Mercer Bullard, founder of FundDemocracy.com, referring to what the SEC’s fine could have been absent this internal review. “There’s no question that the size of this payment is driven partly to send a message to the SEC that Fidelity is handling this adequately on an internal basis.”

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