NASD announced today that it has fined four Boston-based Fidelity broker-dealers a total of $3.75 million for improperly maintaining NASD registrations for 1,100 individuals, failing to assign registered supervisors to 1,000 individuals, failing to retain the email of 1,900 registered individuals, and other electronic recordkeeping failures.
NASD also ordered the four broker-dealers to conduct comprehensive audits of the firms' systems, policies and procedures relating to registration and electronic recordkeeping.
NASD further found that, in connection with the receipt of gifts and entertainment, Fidelity Distributors Corporation (FDC), the principal underwriter of the Fidelity family of mutual funds, failed to supervise certain registered individuals for compliance with Fidelity's ethics and conflicts of interest policies applicable to all Fidelity employees. These individuals worked as traders for FMR Co, the investment advisor to the Fidelity family of funds, but were registered with FDC. In addition to FDC, the other firms charged were Fidelity Brokerage Services LLC, the introducing broker-dealer for all of Fidelity's retail customer accounts; Fidelity Investments Institutional Services Company, Inc., which markets non-retirement and retirement plan products and services; and National Financial Services LLC, the clearing broker for FBS and other introducing firms.
"It is inexcusable that four affiliated brokerage firms would fail to comply with essential registration, supervision and email requirements," said James S. Shorris, NASD Executive Vice President and Head of Enforcement. "These failures were especially significant here because they permitted an environment where improperly registered employees of a Fidelity investment advisor were able to engage in conduct that created actual or apparent conflicts of interest involving the employees, Fidelity and its fund customers."
NASD found that broker-dealer FDC permitted certain new employees hired by the investment advisor FMR Co. to "park" NASD licenses they held prior to joining Fidelity - even though they did not perform any functions for the broker-dealer. NASD further found that together, the four Fidelity broker-dealers improperly maintained registrations for 1,100 individuals who did not perform jobs for which an NASD license is required or permitted. By parking and/or improperly maintaining those licenses, the Fidelity broker-dealers effectively gave those individuals the ability to rejoin a brokerage firm at a later time without the re-testing required of those who are unregistered for two or more years. NASD's qualification and registration requirements are intended to afford reasonable assurance to the investing public that registered individuals maintain and update their knowledge about products and services available to investors, as well as applicable rules, regulations, policies governing the investment banking and securities business.
In addition, NASD found that the four broker-dealers failed to assign registered supervisors to 1,000 registered individuals. None of the broker-dealers had any mechanism, policy or procedure in place in place to ensure that registered individuals to whom no registered supervisor was assigned complied with NASD rules. These violations occurred because the Fidelity broker-dealers permitted employees from every aspect of the Fidelity-wide enterprise to maintain registrations if they chose to do so, and they did not assess on an individual basis whether the activities of each individual fell within the "permitted" or "required" categories for NASD registration.
NASD also found that, from 2002 through 2004, at least nine of the FMR Co. investment advisor traders whose licenses were parked at FDC received gifts and entertainment valued at hundreds of thousands of dollars from employees of brokerage firms who sought business from FMR Co. During that time, FDC's gift policy and Fidelity's corporate-wide gift policy prohibited employees from giving or receiving gifts with a value of more than $100 per calendar year from a current or prospective customer. Likewise, Fidelity's entertainment policy prohibited employees from giving or accepting transportation (other than local ground transportation), lodging or other travel-related expenses to attend an entertainment event with customers without reimbursement from or to the customer for the expense. Fidelity also maintained a general policy governing professional conduct and conflicts of interest which provided that "Fidelity expects employees to have high standards of performance, integrity, productivity and professionalism." This general policy also required employees to be familiar with and adhere to the more particular standards set forth in Fidelity's gift and entertainment policies. NASD found that FDC failed to take any action to identify or examine the nature, frequency, extent and expense of the gifts and entertainment received by the investment advisor traders to determine if the gifts and entertainment were in compliance with Fidelity's policies.
Examples of gifts provided by brokerage firm employees to the investment advisor traders included: several private chartered flights, including flights provided to an NASD-registered Fidelity trader and his wife for their honeymoon; tickets and lodging at expensive hotels for Wimbledon tennis tournaments; tickets to a Justin Timberlake/Christina Aguilera concert; tickets to the US Open Tennis Tournament; twenty bottles of expensive wine, including twelve bottles of 1993 Chateau Petrus (Pomerol).
Examples of entertainment provided by brokerage firm employees to the investment advisor traders included: private chartered flights to various destinations including, but not limited to, Palm Beach and Miami Beach, FL, and Nantucket, MA, for overnight and weekend golf outings; a bachelor party for one of the registered investment advisor traders; and tickets to the 2004 Super Bowl. The golf outings included annual, multiple-day golf trips at venues such as Las Vegas, NV; Cabo San Lucas, Mexico; and Arizona. These events included extravagant private accommodations for the investment advisor traders.
NASD also found that, from 2001 through 2004, the Fidelity broker-dealers failed to retain email related to their business as such as required by NASD rules and federal securities laws. Pursuant to a written, corporate-wide policy applicable to each broker-dealer, the Fidelity broker-dealers retained email of only certain registered individuals and failed to keep email of 1,900 other registered individuals- totaling approximately 18 percent of all registered individuals at the time. This group consisted of NASD-registered individuals whom the firms determined were not doing the work of the broker-dealer. In connection with NASD's recent investigation of gift and entertainment activities by registered individuals, NASD requested that the Fidelity broker-dealers produce email for the investment advisor traders. The Fidelity broker-dealers, however, could not ensure that they had produced all email that should have been retained for these individuals and that they had fully complied with NASD's regulatory requests. In addition, prior to December 2002, the Fidelity broker-dealers recorded over back-up tapes and, from 2001 to August 2003, failed to capture and preserve all Instant Messages and Bloomberg email.
The Fidelity broker-dealers settled the action without admitting or denying the charges, but consented to the entry of NASD's findings.