NASD Fines Fidelity Broker-Dealers $3.75M for Recordkeeping Failures

According to a   press release from NASD, among other recordkeeping breakdowns, the regulator claims the broker-dealers improperly maintained NASD registrations for 1,100 individuals who did not perform the duties required by NASD to have a license, failed to assign registered supervisors to 1,000 individuals and didn’t keep the e-mail of 1,900 registered individuals.

“It is inexcusable that four affiliated brokerage firms would fail to comply with essential registration, supervision and e-mail requirements,” said James Shorris, NASD Executive Vice President and Head of Enforcement, in the news release. “These failures were especially significant here because they permitted an environment where improperly registered employees of a Fidelity investment adviser were able to engage in conduct that created actual or apparent conflicts of interest involving the employees, Fidelity and its fund customers.”

In its own investigation, NASD found that Fidelity Distributors Corporation (FDC), the principal underwriter of the Fidelity family of funds, allowed certain new employees hired by FMR Co., the investment adviser to the Fidelity family of funds, to keep the NASD licenses they held prior to joining Fidelity even though they did not perform any functions for the broker-dealer – a document that allowed the employees to rejoin a brokerage firm at a later date without having to meet the re-testing condition required for broker-dealers unregistered for two or more years.

NASD also found that the four broker-dealers failed to assign registered supervisors to 1,000 registered individuals and had no safeguard in place to ensure that registered individuals not assigned to a registered supervisor complied with NASD rules.

From 2001 through 2004, the broker-dealers did not meet NASD and federal securities laws requirements that they hold onto the e-mail related to their business, retaining the e-mail of only certain registered individuals and failed to keep the e-mail of approximately 18% of all registered individuals at the time, according to the release.

NASD also accused FDC of not making sure registered traders working for FMR Co. met the ethics and conflict of interest policies required by all Fidelity employees. From 2002 through 2004, at least nine of the FMR Co. investment adviser traders whose licenses were held at FDC received gifts and entertainment valued at hundreds of thousands of dollars from employees of brokerage firms who sought business from FMR Co., NASD said (See   Fidelity to Pay $42M After Report Reveals Gifts to Traders ).

At the time, the gift policy barred employees from giving or receiving gifts that topped $100 each year from a current or prospective client and 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.

NASD found that FDC had no procedures in place to make sure conflict-of-interest breaches did not occur.

Some of the gifts from brokerage firm employees to the investment adviser traders included several private chartered flights; tickets and lodging at expensive hotels for Wimbledon tennis tournaments; concert and tennis tournament tickets; and expensive bottles of wine.

In addition to FDC, the other Fidelity-affiliated firms fined by NASD include: Fidelity Brokerage Services LLC (FBS), Fidelity Investments Institutional Services Company, Inc., National Financial Services LLC.