The SEC entered a series of administrative orders against Fidelity Investments and 13 current and former employees for improperly accepting more than $1.6 million in travel, entertainment and other gifts paid for by outside brokers that executed trades for certain mutual funds it manages. The brokerage firms each received millions of dollars in commission revenue for handling orders from Fidelity's advisory clients' accounts.
The SEC found that certain employees and officers received a host of travel, entertainment and other gifts paid for by outside brokers, including private jet trips to such places as Bermuda, Mexico and Las Vegas and premium sports tickets to events including Wimbledon, the Super Bowl and the Ryder Cup golf tournament. The traders, according to the SEC, allowed the receipt of travel, entertainment and gifts to influence their selection of brokers to handle transactions for Fidelity's funds and other advisory clients. In the SEC's view, Fidelity failed to adopt and implement a system of controls sufficient to detect, deter and prevent the receipt by these executives and traders of travel, entertainment and gifts paid for by brokers.
Section 17(e)(1) of the Investment Company Act prohibits affiliated persons of a registered investment company, such as Fidelity executives and traders, from accepting "from any source any compensation (other than a regular salary or wages from such registered company) for the purchase or sale of any property" of the investment company. The SEC found that the traders, who are affiliates of the Fidelity Funds, received compensation in violation of Section 17(e)(1). In addition, Peter Lynch, another Fidelity executive, aided and abetted Fidelity traders' violations of Section 17(e)(1).
Under Section 206 of the Advisers Act, an investment adviser has a fiduciary duty to seek best execution for its clients' securities transactions. According to the SEC, Fidelity allowed certain employees' receipt of travel, entertainment and gifts and certain employees' family or romantic relationships to enter into the process of selecting brokers. Thus, the SEC concluded that Fidelity willfully violated Section 206(2) of the Advisers Act, resulting in the substantial possibility of higher execution costs for Fidelity's advisory clients.
The SEC also found a number of other securities law violations caused by the brokerage practices of Fidelity, including failing to disclose conflicts of interests to clients created by the practices.
Please click http://sec.gov/news/press/2008/2008-32.htm for a copy of the press release related to the administrative orders, which has links to the administrative orders.