Massachusetts regulator charges Fidelity unit over unregistered advisers

By Ross Kerber

BOSTON (Reuters) - Massachusetts' top securities regulator said on Monday he had charged a brokerage unit of Fidelity Investments with "dishonest and unethical conduct" by allowing unregistered investment advisers to make trades on its broker-dealer platform.

The regulator, William Galvin, called out Fidelity in a statement for "a systemic failure" to spot the activity, which he described as "blatant." An administrative complaint said Fidelity Brokerage Services LLC allowed at least 13 advisers who were not registered with the state as required to carry out trades under authorization forms submitted by Fidelity customers.

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

Galvin, the Massachusetts Secretary of State, said his office spotted the issue as it ramped up oversight under rules giving states new responsibilities for financial advisers and that the investigation was still open.

Asked whether some of the people advising Fidelity clients had registered elsewhere, Galvin said that would not matter since the activity lasted for years.

"This is not like an overdue library book," he said in an interview. "It's very disappointing to see this lack of focus on who is on your trading platform."

In one case cited in the complaint, an unregistered adviser's activity "was so blatant that on three separate occasions, twice in 2006 and once in 2014, Fidelity instructed him to register" and yet still allowed the adviser to work with Fidelity customer accounts.

Fidelity also encouraged that adviser's trading with gifts such as airline frequent-flier files and tickets to a professional sporting event, the complaint said.

According to the complaint, Fidelity began a review of the activity by unregistered investment advisers last year, apparently expedited by Galvin's investigation, and that since the start of this year 13 unregistered advisers in Massachusetts have had their trading authorizations revoked by the company.

Fidelity was concerned about its own exposure to risk but did not express concern about the risks the activity posed to its retail customers, the complaint said. Among other things, Galvin seeks to have Fidelity censured, that it hire a compliance consultant and pay an unspecified fine.

(Reporting by Ross Kerber; Editing by Christian Plumb and Grant McCool)

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