Fidelity Brokerage Arm Is Broken Says Regulator

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Fidelity Brokerage Services was charged in an administrative complaint by State of Massachusetts’s  top securities cop Thomas Galvin with “dishonest and unethical behavior” for allowing unregistered investment advisers to make trades through the Fidelity broker-dealer platform, thereby generating fees for both the firm and the unregistered advisers.

At least 13 unregistered Massachusetts investment advisers used Fidelity’s platform, according to a statement from secretary of the commonwealth William Galvin.

For those advisers, “Fidelity served as a haven from regulatory oversight as it ignored blatant unregistered investment advisory activity,” according to a statement from Mr. Galvin’s office.

“We do not believe that Fidelity has violated any laws or regulations in connection with this matter,” said Adam Banker, a Fidelity spokesman. “We look forward to reviewing the details of this matter and addressing them appropriately.”

“Fidelity, of all companies, knows full well the range of investor protection provisions resulting from regulatory oversight,” Mr. Galvin said in the statement. “For them to knowingly allow unregistered activity on their broker-dealer platform is a profound failure of their regulatory obligations.”

In one instance, more than 20 Fidelity customers paid one unregistered investment adviser who was trading on their behalf $732,000 in advisory fees over a 10-year period, according to the complaint. The complaint alleges that Fidelity had knowledge that the individual was acting as an adviser during that entire period and encouraged his trading activity by providing the purported adviser, who made thousands of trades in the accounts of his clients, with gifts such as frequent flyer miles and tickets to a professional sporting event.

Fidelity had policies in place since 2011 that specified red flag risk warnings for certain levels of third-party trading, but those were ignored until recently, according to the statement from Mr. Galvin.

Fidelity Fined For Overcharging Fees for 7 Years

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fidelityBrokerdealer.com blog update courtesy of InvestmentNews’, Mason Broswell.

One of the largest mutual funds groups, Fidelity Investments has been ordered to pay a fine after inappropriately charging fee-based accounts that received brokerdealer services for over 7 years.

The Financial Industry Regulatory Authority Inc. has ordered Fidelity Investments to pay a $350,000 fine after the firm allegedly overcharged more than 20,000 clients a total of $2.4 million.

From January 2006 to September 2013, Fidelity inappropriately charged for certain transactions in fee-based accounts in its Institutional Wealth Services group, which provides trading and brokerage services to investment advisers and their clients, Finra said in a letter of settlement.

Finra said the overcharges resulted from a lapse in supervision over how Fidelity applied fees under its asset-based pricing model, which generally charged on assets rather than by transaction.

“The firm did not clearly delegate responsibility for the supervision of fee-based brokerage accounts,” Finra said in the letter of settlement. “In fact, until 2013, the firm did not designate a supervisory principal to oversee its [institutional wealth services] asset-based pricing program.”

As a result, certain clients may have been double-billed or charged excess commissions in addition to the asset-based management fee, according to Finra’s letter. For instance, in over 1,000 fixed income transactions initiated by advisers, clients were erroneously charged a markup on the transaction in addition to the asset-based fee, Finra said.

Fidelity discovered the problems in the spring of 2012, self-reported the issue to Finra and voluntarily reimbursed all clients, according to Adam Banker, a spokesman for Fidelity. The issues affected roughly 1.5% of the brokerage accounts held for investment advisers and the majority required reimbursement of less than $100, according to Mr. Banker.

“[Institutional Wealth Services] conducted a thorough internal review of this matter, which resulted in the implementation of enhanced controls and oversight for its asset-based pricing program,” said Mr. Banker in an emailed statement. “IWS completed these steps prior to the conclusion of Finra’s review of this matter.”

The firm agreed to the settlement letter without admitting or denying the findings.

Fidelity’s Institutional group is the third-largest custodian when ranked by number of registered investment adviser clients and serves around 3,000 RIAs, according to InvestmentNews’ RIA Custody Database.

Fidelity’s direct-to-consumer, workplace savings accounts and correspondent broker-dealer clearing business, which operates as National Financial, were not affected, Mr. Banker said.

Uber Snags $1.2Bil in Funding at $17Bil Valuation: Deal Investors Drive Record Raise for Car-Ride Service

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A BrokerDealer.com/blog special:

Bankers, Broker-Dealers, venture and private equity investors, and the universe of fast-growth start-ups who keep an eye on the pulse of pre-IPO funding rounds were salivating on Friday after Uber, the car ride service, announced it raised $1.2bil from “institutional investors, mutual funds, private equity and venture capital,” with a second round of investors coming soon. The new round of financing values the company at a total $18.2 billion. The company’s pre-money valuation, not counting the latest round of funding, was $17 billion.

Investors hope the company, which allows users to summon a ride on their smartphones, can expand globally and diversify into logistics.
The investors in the round valued Uber “pre-money” at $17 billion, the blog post said. The $1.2 billion infusion took the startup’s valuation to $18.2 billion.

Fidelity Investments put in about $425 million, Wellington Management added $209 million and BlackRock Inc contributed $175 million, according to a person familiar with the matter.

Venture firms Summit Partners, Kleiner Perkins Caufield & Byers, Google Ventures and Menlo Ventures also participated in the round, a person familiar with the matter said. Kleiner’s investment came from its Digital Growth Fund, run by former stock analyst Mary Meeker, known for her bullish recommendations during the first dot-com boom. Her fund has had recent hits, including traffic app Waze, acquired last year for $1.1 billion by Google.

“Uber is one of the most rapidly growing companies ever, and we believe there are opportunities for continued tremendous growth,” Joan Miller, a spokeswoman for Summit Partners, an investor in the funding round, said by telephone.Uber, which did not give details about its latest investors, operates in 128 cities across 37 countries.

Kalanick said he expected to close a second round of funding from strategic investors of about $200 million