NASD Fines Two Fidelity B/Ds $400K

NASD announced Tuesday that it has fined two Fidelity Investments broker/dealers—Fidelity Investments Institutional Services Co. and Fidelity Distributors Corp.—$400,000 for distributing misleading sales performance information about investment plans sold primarily to military personnel. The money will go to the NASD investor education program for the benefit of the military community.

The investment plans concerned are the Fidelity Destiny I and II systematic investment plans. They require investors to make a fixed number of monthly payments over a 10- to 15-year period, which Congress prohibited last fall.

“The Fidelity Destiny plans were sold using various performance charts and data that presented a misleading picture of the plans’ performance,” explained James S. Shorris, executive vice president and head of enforcement at the NASD. “These failures were aggravated by the fact that the plans were sold primarily to military personnel, who often have limited time to study the marketing materials for investment products. And these particular products involve complex or unique features that may not be fully understood by the customers to whom they are offered or by the brokers who recommend them.”

Specifically, the NASD said that between May 2003 and January 2006, the B/Ds distributed sales literature containing “mountain charts” showing the two funds significantly outperforming the S&P 500 Index over a 30-year period to mask the fact that they underperformed the index  in the most recent 10- and 15-year timeframes.

Then, the brochures stated the plans’ average annual returns for one, five and 10 years without showing the comparable S&P 500 Index’s returns.

The B/Ds also showed the performance of a share class not available to the investors, rather than the higher-cost, and therefore weaker performance, share class available to them.

Finally, the B/Ds distributed a newsletter to investors in May 2003 that showed the performance of the Destiny I plan without including the impact of a 50% sales charge on the first year’s payments and a continuing sales charge.

Fidelity settled the matter without admitting or denying the charges, but consented to the entry of the NASD’s findings.

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