Fidelity Brokerage Services (FBS) failed to properly vet Massachusetts retail investors who applied to be approved to conduct options and margin trading, according to a new complaint filed by Commonwealth Secretary William Galvin’s office.
The b/d’s lax approach led to instances where applicants that overstated their experience and employment information were approved even though FBS was privy to information disputing these assertions. In a statement about the complaint, Galvin said companies could not “rubber-stamp” options trading applications without due diligence.
“With the recent increase in interest in online options trading among many young retail investors, as well as the rise of online and mobile applications, broker/dealers need to make sure they’re still maintaining the same standard of care and attention and making sure these investors qualify,” he said.
Specifically, the administrative complaint alleged FBS “engaged in facially unethical and dishonest conduct” by failing to properly review the applications. The complaint stated that Fidelity fell short in several ways, including failing to review customer information on file, train its Central Review Team (CRT) staff and oversee that its own policies met Massachusetts securities law standards.
According to the complaint, FBS had a provision requiring that reviewers be aware that a customer could reapply for approval by increasing their financial or work experience information, so assertions made in new applications should be checked against any previous ones filed by the same applicant for inconsistencies. But FBS purportedly failed to enforce the provision, and instead had an “assembly line approach” to reviewing approval applications, making it easy for customers to outsmart them by submitting multiple applications.
The CRT staff missed numerous inconsistencies in applications between mid-March 2020 and June 2021, according to Galvin. In some cases, applicants claimed they’d gained years of experience in just a few days, or that their annual incomes increased in the time span of less than one day after a prior application was denied. In one instance, an applicant claimed he’d been promoted from ‘Scientist’ to ‘CEO’ less than one day after his previous application was rejected, while another applicant said his occupation was ‘Job.’
“Despite having access to every prior options and margin application that a retail broker customer has ever submitted, CRT members never look beyond the single application in front of them,” the complaint stated.
Between March 2020 and December of last year, Fidelity approved more than 27,300 options applications. In one instance, a single determined customer submitted 13 applications in a month.
The complaint argued that in acting as it had, FBS risked exposing “inexperienced retail brokerage customers'' to hazardous options and margin trading. After the Securities Division began its investigation, FBS purportedly instituted a new policy that prohibited an applicant from submitting an electronic application if they’d already submitted two applications in the previous 60 days.
“However, this does not necessarily prevent back-to-back submissions of electronic options applications,” the complaint read. “FBS still does not limit how frequently a retail brokerage account may submit paper options applications, nor does it limit how frequently a retail brokerage customer may submit margin applications of either kind.”
According to a Fidelity spokesperson, the b/d has cooperated “fully” with the Securities Division.
“FBS has a longstanding commitment to delivering excellent customer service, operating with integrity, and adhering to industry standards and regulations,” it said. “We disagree with the characterizations of FBS contained in the complaint, believe that we have effective due diligence processes, and look forward to addressing and resolving this matter through the administrative process.”
The complaint was announced a day after Galvin detailed a sweep his office is conducting on certain broker/dealers about their disclosures to smaller-dollar customers with investments in certain target-date mutual funds. Galvin is seeking reelection as secretary of state, a position he's held since 1994.
