Massachusetts Regulator Says Fidelity Let Unregistered Advisers Trade on Its Broker-Dealer Platform

Commonwealth William Galvin has filed an administrative complaint against Fidelity Brokerage Services. The firm is accused of letting at least 13 unregistered investment advisers trade on its broker-dealer platform, which caused Fidelity and the advisers to earn fees.

This practice, which involved unregistered advisers having their clients turn in trade authorizations to the brokerage firm so that they could access the accounts, purportedly took place for more than ten years beginning in 2005. For example, the state regulator contends that over twenty Fidelity customers paid one unregistered investment adviser $732,000 in fees over ten years in which he made over 12,000 trades in his account and nearly 29,000 trades in client accounts.

Galvin believes that Fidelity knew that this person was acting as an unregistered adviser, even at one point pressing him to register. However, claims the regulator, despite remaining unregistered, the trader was rewarded because of referrals he made to the broker-dealer. Seven Fidelity customers paid him $732,000 as compensation for his services.

Per Fidelity policy, customers can give someone else the authority to make transactions in their accounts. The broker-dealer is not required to check out that relationship and doesn’t limit who can be appointed as that authorized third party. In a statement, Galvin said that Fidelity failed in its regulatory duty to protect investors by allowing unregistered activities on its platform. However, a spokesperson for Fidelity said that the firm did not believe it had violated any regulations or laws related to the issue cited in the administrative complaint.

An analysis by the firm found over 90 residents with at least 15 trading authorizations over customer accounts at Fidelity. Since the beginning of this year, 13 unregistered advisers in Massachusetts have had their trading authorization taken away because they failed to register.

Galvin is calling on Fidelity to permanently cease and desist from committing “dishonest and unethical conduct.” The state regulator the broker-dealer to hire an independent compliance consultant to assess policies and procedures involving trading authorization. It is also asking for unspecified administrative fines.

Secretary Galvin Charges Fidelity Brokerage Services with Dishonest and Unethical Conduct Allowing Unregistered Investment Advisers to Conduct Business
, October 26, 2015

Read the Complaint (PDF)