Fidelity Retail Arm Settles Records Case
The retail brokerage arm of mutual fund giant Fidelity Investments agreed Tuesday to pay $2 million in fines to settle regulators’ charges that employees destroyed or altered company books and records in at least 21 of the firm’s 88 branch offices, mostly in the West.
After a joint investigation, the Securities and Exchange Commission and the New York Stock Exchange said Fidelity personnel in offices mainly in Arizona, California, Oregon, Utah and Washington had falsified or destroyed some client records in advance of regular internal inspections in 2001 and the first half of 2002.
The inspections were to ensure that the Fidelity Brokerage Services offices were complying with securities laws and Fidelity’s own internal policies.
Some of the firm’s managers were so intent on employees achieving perfect scores that they gave the offices advance notice of the inspections, regulators said. Branch personnel could then go through files and destroy or fix documents that were incomplete or otherwise in error.
Fidelity officials, who said the alleged violations were discovered partly as the result of a tip from an employee, maintained that no clients were harmed and that trade executions weren’t affected. They emphasized that only copies of client records were involved. Original documents are maintained at the company’s headquarters in Boston and weren’t altered or destroyed, spokeswoman Anne Crowley said.
“Our internal investigations did not reveal any financial harm to customers,” she said. “Fidelity Brokerage Services certainly regrets that these events occurred and has worked very hard over the past two years to reinforce all the firm’s policies and rules and regulations involving books and records.”
In its settlement, Fidelity did not admit to or deny regulators’ findings. However, since the document changes were discovered the company has fired 13 employees and replaced virtually all of the regional managers and the Western region compliance officer, Crowley said.
“We have a completely different management team than when this happened,” she said.
Virtually all of the firm’s Western offices and at least 62 individuals were involved in the alleged misconduct, regulators said.
Though Fidelity officials said Tuesday that the actions apparently were an attempt to avoid minor record-keeping infractions, regulators said the documents affected -- including new account applications, variable annuity forms and letters of authorization -- were key in determining clients’ suitability for investment products. Such documents can be important in any customer litigation involving alleged broker misconduct.
“Destroying and ‘cleaning up’ files in advance of internal inspections or NYSE examinations corrupts the integrity of the regulatory process and will not be tolerated,” said Susan L. Merrill, chief of enforcement at the NYSE.
Fidelity’s fine consisted of a $1-million penalty levied by the NYSE and a $1-million civil penalty by the SEC.
“It was a significant penalty because the misconduct was significant and involved so many employees and managers,” said Michele Wein Layne, SEC assistant regional director for enforcement in Los Angeles.
The NYSE also imposed separate disciplinary penalties against seven former Fidelity employees in related cases. The seven worked at branches in Oregon and Utah. All agreed to the actions without admitting or denying guilt, regulators said.
