Massachusetts Secretary Galvin Charges Fidelity with Unethical and Dishonest Conduct in Options and Margin Approval Due Diligence

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Posted on 02/13/2022

The Secretary of the Commonwealth, William Francis Galvin, is the constitutional officer who, through the Massachusetts Securities Division is entrusted with the task of administering and enforcing Massachusetts General Law, Chapter 110A, the Uniform Securities Act, and the regulations promulgated thereunder (the “Rules”).

The Enforcement Section of the Securities Division of the Office of the Secretary of the Commonwealth of Massachusetts filed an administrative complaint against Fidelity Brokerage Services on January 26, 2022. The firm has been accused of not making a good enough attempt to vet investors’ applications before allowing them to engage in options and margin trading. This led to financial losses for investors. Fidelity Brokerage Services LLC is a securities broker-dealer and a subsidiary of Boston-based FMR LLC (Fidelity Investment Management & Research or Fidelity Investments).

Part of the complaint reads, “Specifically, FBS engaged in facially unethical and dishonest conduct in the securities business by recklessly failing to make a good-faith effort to review options and margin applications submitted by individual retail investors. As a result of FBS’s halfhearted and lackadaisical attitude toward safeguarding, the firm granted options and margin approval to Massachusetts customers in violation of Massachusetts securities laws. FBS’s blatantly unethical disregard for safeguarding, along with its inadequate supervisory compliance policies, continue to risk exposing retail brokerage customers to the hazards of options and margin trading, thereby threatening both the financial health of its Massachusetts customers and the stability of the securities market. These failures are especially problematic in light of the explosive growth FBS experienced in its retail brokerage account business over the course of 2021. As of September 30, 2021, FBS had a total of 30.9 million retail brokerage accounts, a 22.9% increase from Q3 of 2020. Younger customers were responsible for opening a substantial number of these new retail brokerage accounts. In fact, customers age 35 or younger opened 1.6 million of the 4.1 million total new accounts that FBS gained during Q1 of 2021, a 222.8% increase from Q1 of 2020. During Q2 of 2021, FBS gained an additional 697,000 new retail brokerage accounts that were opened by customers age 35 or younger, a 65% increase from Q2 of 2020.”

Because of Fidelity Brokerage Service’s allegedly inadequate supervisory compliance policies and lack of safeguarding, the brokerage firm exposed U.S. retail customers to the “hazards” involving options and margin trading. In the aggregate, these pose a threat not just to these investors’ financial health but also to the securities markets.

This is especially important considering that the broker-dealer experienced an “explosive growth” in its business in 2021.