Massachusetts Brings Complaint Against Fidelity Over Trading in Client Accounts by Unregistered Advisors

The State of Massachusetts Securities Division recently announced that it had filed a complaint against Fidelity Brokerage Services LLC (Fidelity) accusing the firm of allowing unregistered investment advisers (RIAs) to make trades in Fidelity customer accounts over the last decade that generating fees for themselves and the unregistered RIA and failing to stop the activity. William F. Galvin, secretary of the commonwealth, said that Fidelity had acted as a “haven from regulatory oversight” for unregistered advisers and is “emblematic of a systemic failure to detect and prevent unregistered activity.”

Massachusetts claims that Fidelity allowed unregistered investment advisers to use its trading platform to conduct investment advisory business since 2005. The basis of the complaint is that Fidelity acted as a market access gateway to these client’s accounts allowing the unregistered activity to occur. All the unregistered advisors had to do was submit trading authorizations to Fidelity while Fidelity failed to analyze or investigate the relationships between the parties.

According to the New York Times, Massachusetts asked Fidelity to begin a review last year of its internal risks stemming from unregistered investment advisers placing trades for customers. Fidelity’s analysis found that 93 Massachusetts residents had 15 or more trading authorizations over Fidelity customer accounts. In addition, since January 2015, 13 Massachusetts unregistered advisers have had their trading authorizations revoked because the traders failed to register with the state securities regulators.

While Massachusetts complained that the activity was widespread, the complaint highlighted one unregistered adviser who managed 19 accounts and had $9 million in assets under management. This advisor was last registered as a broker in 2004 and had his own personal brokerage accounts at Fidelity. According to the complaint, Fidelity employees had conversations with the adviser asking him to register in order to continue trading other accounts. However, the advisor did not register for years and the trading continued. In addition, Massachusetts found that there were potential conflicts of interests in the advisors activity citing at least one instance in which trades in the advisors personal accounts were made before customer trades.

The complaint alleges that Fidelity put its own clients at risk through its arrangement with unregistered advisers. Moreover, Massachusetts accused Fidelity of seeking to profit from its relationships with unregistered advisors by offering free trades for customer referrals made to the firm and providing gifts to the advisors including invitations to professional hockey games. Fidelity also processed the management fees for the unregistered advisors further facilitating the wrongful activity.

The stock broker lawyers of Gana LLP are experienced in representing investors in cases where their advisor has acted inappropriately. The firm represents investors who have suffered losses in securities arbitration and other claims. Our consultations are free of charge and the firm is only compensated if you recover.