In the first two weeks of February, NASD (the governing body for securities firms) sanctioned several companies, including Fidelity Investments, for violations of regulations applying to gifts, entertainment, and meetings.
On February 5, NASD fined four Fidelity brokerage units $3.75 million in the aftermath of a gift and entertainment probe dating back to 2004. The probe had previously resulted in fines against the New York-based brokerage firm Jeffries & Co., as well as a decision by Fidelity to pay investors $42 million because the lavish gifts, entertainment, and travel its brokers received from Jeffries may have not been in their clients’ best interests.
The NASD investigation into the above-mentioned gift and entertainment practices found Fidelity failed to comply with NASD registration, e-mail, and supervisory requirements. Fidelity was also sanctioned for failing to adequately supervise employee compliance with company ethics and conflict of interest policies.
"These failures were especially significant here because they permitted an environment where improperly registered employees of a Fidelity investment advisor were able to engage in conduct that created actual or apparent conflicts of interest involving the employees, Fidelity, and its fund customers,” said James S. Shorris, NASD executive vice president and head of enforcement, in a statement announcing the NASD action.
Three More Firms Fined
Less than 10 days later, on February 12, NASD fined three additional firms $700,000 for violations of non-cash compensation guidelines, including providing improper entertainment at educational meetings and paying for guest expenses at the meetings.
NASD fined Scudder Distributors of Chicago $425,000, Putnam Retail Management Limited Partnership of Boston $175,000, and AllianceBernstein Investments Inc. of New York $100,000.
Specifically, NASD found that between 2001 and 2004, Scudder improperly allowed spouses to attend educational meetings and paid for their expenses, including meals at “premier” restaurants in New York City. Scudder was also sanctioned for improper entertainment at these meetings (such as a “Whisky-A-Go-Go” theme party), and for providing additional room nights and recreational activities—golf, fishing, and horseback riding—for selected attendees.
Putnam, according to NASD, paid for meals and ground transportation expenses for brokers’ spouses and guests at a number of training and education meetings held between 2001 and 2004. Putnam also treated attendees and guests to a Boston Red Sox game, which was considered an inappropriate activity for an educational meeting.
Similarly, NASD found that on several occasions in 2001 AllianceBernstein improperly paid for brokers’ guests to attend dinners and Broadway shows in connection with education and training meetings. The action against the three firms, said NASD’s Shorris in a statement, “underscores the need for distributors of mutual funds and variable annuities to understand the limits surrounding the use of noncash compensation. Noncash compensation of the sort found in this case is prohibited because it can induce brokers to put their own interests ahead of their clients' interests."