Fidelity unit settles SEC case over prospectuses for $2.5M

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Fidelity’s National Financial Services agreed to its largest regulatory payout in at least 13 years to settle an SEC case involving delivery of prospectuses.

The Fidelity Investments subsidiary underwrote the public sale of more than 70 million shares of stock in a fuel cell technology firm for $148 million over a dozen years without providing any final prospectuses, according to the firm’s Sept. 3 settlement with the SEC. NFS will pay a civil monetary penalty, disgorgement and prejudgement interest of $2.46 million.

It’s not clear whether any clients who purchased the shares were working with broker-dealers. Some 200 BDs use NFS through their relationships with Fidelity Clearing & Custody Solutions.

No clients are receiving restitution under the settlement and, when asked, the company didn’t say who purchased the stock.

“NFS is pleased to resolve this matter,” spokeswoman Sophie Launay said in a statement.

It’s the largest regulatory settlement listed in FINRA BrokerCheck records for NFS since a February 2007 letter of acceptance, waiver and consent requiring it and three other affiliates to pay $3.75 million. In the earlier case, FINRA’s predecessor alleged failures by the Fidelity units related to registrations and the retention of electronic communications.

NFS sold the shares in FuelCell Energy between 2005 and 2017 in five at-the-market delayed shelf offerings that had base prospectuses, the settlement states. No final versions “were ever prepared, filed, or delivered” stating the plan of distribution, intermediary compensation or, in the case of the last two offerings, the type and amount of securities, according to the SEC.

“A final prospectus serves to memorialize the terms and nature of the offering for those who purchase securities in an offering and for the market generally,” the settlement states.

“This disclosure is especially important in the context of an at-the-market shelf offering,” the document continues. “Without this disclosure, purchasers of shares in an at-the-market shelf offering and the market remain unaware that an issuer has taken a specific type and number of securities off the shelf and begun selling them into the market.”

NFS received commission payments of hundreds of thousands of dollars through the sales, according to the SEC. The settlement consists of a $1.5-million fine, disgorgement of $798,000, interest of $163,000 and a censure against NFS.

SEC investigators did not allege any violations by Danbury, Connecticut-based FuelCell, a publicly traded firm that joined the Russell 3000 Index in June. Representatives for the firm didn’t respond to requests for comment.

The trader who was primarily responsible for executing the trades came from the institutional cash equity trading desk, which “did not generally engage in underwriting activities,” according to the SEC. The desk usually works with other divisions of Fidelity, as well as external clients like insurance companies, fund managers and pensions, the document states.

“After certain underlying facts concerning these sales of securities came to the attention of compliance and legal personnel at NFS in 2016, NFS did not take timely and effective corrective action to prevent further violations,” according to the SEC. NFS kept selling the stock until April 2017, when FuelCell ended its final at-the-market offering with the firm, the document states.

The settlement amounts to the second largest payout involving NFS after the 2007 case. Fidelity Investments has paid at least $37.3 million in lawsuits and regulatory cases since 2000, according to a database maintained by Good Jobs First, an organization that is affiliated with environmental and labor groups. Rival Charles Schwab’s penalties add up to $136.5 million over that span, according to the database.

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Compliance SEC enforcement Enforcement Clearinghouses/custodians Independent BDs Fidelity Investments Fidelity Clearing & Custody Solutions
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