UNITED STATES OF AMERICA
In the Matter of
FIDELITY BROKERAGESERVICES, LLC,
|ORDER INSTITUTING ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS PURSUANT TO SECTIONS 15(b) AND 21C OF THE SECURITIES EXCHANGE ACT OF 1934|
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant Sections 15(b) and 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Fidelity Brokerage Services, LLC ("Fidelity Brokerage" or "Respondent").
In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over it and the subject matter of these proceedings, Respondent consents to the entry of this Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions Pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934, as set forth below.
On the basis of this Order and Respondent's Offer, the Commission finds that:
1. Fidelity Brokerage is a broker-dealer registered with the Securities and Exchange Commission pursuant to Section 15(b) of the Securities Exchange Act of 1934 (File No. 8 23292). Fidelity Brokerage is a Delaware limited liability company based in Boston, Massachusetts. It is a New York Stock Exchange ("NYSE") member. Fidelity Brokerage is a large multi-service broker-dealer with more than 3.4 million clients.
2. Between January 2001 and July 2002, Fidelity Brokerage violated the broker-dealer record-keeping requirements of the Exchange Act and failed reasonably to supervise employees. These violations related to Fidelity Brokerage's annual internal inspections. The Firm's inspections were designed to determine whether branch offices were complying with Firm policies and procedures, NYSE rules, and the federal securities laws. Fidelity Brokerage Western Region managers pressured branch office employees to obtain "no concerns" reports at the conclusion of the branch inspection. To achieve such results, Western Region managers told its branch office employees when the inspections would occur, provided information and materials to branch office managers, and encouraged branch office managers to review applicable branch office documents in preparation for the inspection. As a consequence, in connection with certain inspections, a number of branch office employees altered or destroyed certain documents. These actions were not discrete or isolated. At least 62 employees had engaged in some form of this conduct in at least 21 branch offices, primarily in its western region.
3. During the relevant period, Fidelity Brokerage had 88 branch offices, called "investor centers," throughout the United States. At the Firm's branch offices, clients met with registered representatives to discuss their accounts, learned about investments and placed orders to buy and sell securities. In addition, clients were able to initiate wire transfers of funds, open new accounts, and issue account instructions. Fidelity Brokerage maintained certain communications relating to customer accounts in its branch offices. It was the Firm's practice to produce branch office copies to the SEC and NYSE staff during on-site regulatory examinations.
4. Each branch office employed registered representatives who were supervised by an on-site branch office manager. Fidelity Brokerage's branch offices in Arizona, California, Colorado, Oregon, Utah and Washington comprised its "Western Region," which was supervised by a team of managers in the region.
5. Employees from the Firm's internal inspection department conducted on-site internal inspections of branch offices on an annual basis. At the conclusion of an inspection, branch managers were provided with an Annual Compliance Examination Report. Items reflected as "concerns" required managers to provide written responses describing the actions taken (or to be taken) to address those issues. Items reflected in the report as "observations" required no response. At certain times during the relevant period, branch offices were notified in advance of the dates on which the inspections would occur. Certain employees in the Western Region took advantage of the advance notification and improperly prepared for the inspection.
6. Regional managers were involved in the inspection preparation process. Fidelity Brokerage regional managers instructed branch managers to prepare for the inspections. They provided training for branch office managers using the previous year's inspection module. The training focused on preparing for internal inspections. Certain branch managers intended to use this training "to beat" the inspection rather than to comply with the Firm's record-keeping requirements. Regional managers instructed employees at branch offices that had already been inspected to share information about the inspections with employees at branch offices that had not yet been inspected. Regional managers also pressured branch office managers to have "no concerns" inspections and implied that they could be fired if there were more than a few inspection exceptions.
7. In preparing for the internal inspections during the relevant period and in an effort to achieve "no concerns" inspections, 62 branch office employees from 21 branch offices, principally in the Western Region, discovered that some of the records maintained in the branch office omitted information or were not completed in accordance with Firm policies and procedures. These employees altered or destroyed new account applications, letters of authorization, and variable annuity forms maintained at Fidelity Brokerage branch offices. Such conduct caused the Firm to maintain inaccurate or incomplete books and records.
8. Fidelity Brokerage learned about the matters described above in July 2002 when a registered representative reported concerns relating to the branch inspection at one branch office to the Firm's ethics office. Fidelity Brokerage immediately conducted an internal investigation and disciplined those employees who were involved, including the termination of 13 branch employees, including three branch managers. The Firm also replaced four members of the Western Regional management team and the region's compliance officer. In addition, Fidelity Brokerage contemporaneously shared its investigative findings and disciplinary actions with the SEC and the NYSE.
9. After its investigation, Fidelity Brokerage developed and implemented enhancements to the Firm's branch inspection program and made improvements to various policies, procedures and controls.
10. Section 17(a)(1) of the Exchange Act provides that each member of a national securities exchange, broker, or dealer "shall make and keep for prescribed periods such records, furnish such copies thereof, and make and disseminate such reports as the Commission, by rule, prescribes as necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of this title."
11. The SEC has emphasized the importance of the records required by the rules. See In the Matter of Deutsche Bank Securities, Inc., Goldman, Sachs & Co., Morgan Stanley & Co., Inc., Salomon Smith Barney, Inc., and U.S. Bancorp Piper Jaffray Inc., Exchange Act Release No. 46937, 2002 SEC Lexis 3083 (December 3, 2002).
12. Rule 17a-4(b)(4) provides that brokers and dealers shall preserve for a period of not less than three years, the first two years in an accessible place: "[o]riginals of all communications received and copies of all communications sent . . . by the member, broker or dealer (including inter-office memoranda and communications) relating to its business as such . . . ."
13. Fidelity Brokerage maintained certain records required to be preserved under Rule 17a-4(b)(4) in its branch offices. It was Fidelity Brokerage's practice to provide branch office copies to the SEC and the NYSE staff during on-site regulatory examinations.
14. Certain employees at Fidelity Brokerage altered some of the records maintained in the branch offices such that they did not represent accurate records of the original communications.
15. Accordingly, as the altered records were maintained for regulatory purposes (i.e., to comply with Rule 17a-4), Fidelity Brokerage willfully violated Section 17(a) of the Exchange Act and Rule 17a 4(b)(4) thereunder, and its employees aided and abetted these violations.1
16. Section 15(b)(4)(E) of the Exchange Act authorizes the Commission to impose sanctions against a broker-dealer if the firm has "failed reasonably to supervise, with a view to preventing violations [of the federal securities laws], another person who commits such a violation, if such other person is subject to his supervision." See e.g. In the Matter of Smith Barney, Harris Upham & Co., Inc., Exchange Act Release No. 21813, 1985 SEC Lexis 2051 (March 5, 1985).
17. The responsibility of broker-dealers to supervise reasonably their employees by means of effective, established procedures is a critical component of the federal regulatory schemes. See In the Matter of Goldman, Sachs & Co., Exchange Act Release No. 33576, 1994 SEC Lexis 302 (February 3, 1994); In the Matter of Kirkpatrick, Pettis, Smith, Polian Inc., Peter N. Lahti And Gregory D. Adams, Admin. Proc. File No. 3-11328, Release No. 34-48748, 2003 SEC LEXIS 2661 (November 5, 2003) ("The Commission has long emphasized that the responsibility of broker-dealers to supervise their employees is a critical component of the federal regulatory scheme."), citing In the Matter of John H. Gutfreund, et al., 51 S.E.C. 93, 108 (1992).
18. For the purposes of Section 15(b)(4)(E) of the Exchange Act, "no person shall be deemed to have failed reasonably to supervise any other person, if (i) there have been established procedures, and a system for applying such procedures, which would reasonably be expected to prevent and detect, insofar as practicable, any such violation by such other person, and (ii) such person has reasonably discharged the duties and obligations incumbent upon him by reason of such procedures and system without reasonable cause to believe that such procedures and system were not being complied with." See e.g. In the Matter of Goldman, Sachs & Co., Exchange Act Release No. 33576, 1994 SEC Lexis 302 (February 3, 1994); In the Matter of Prudential Securities, Inc., Exchange Act Release No. 43896, 2001 SEC Lexis 155 (January 29, 2001).
19. In general, unannounced branch office inspections can be an important part of branch office supervision. When the timing and subject matter of some of a firm's internal inspections are not announced in advance, a broker-dealer may be able more accurately to assess its branch offices' compliance with the federal securities laws, NYSE rules, and firm policies and procedures.
20. The Firm was unable to detect the conduct described above due to several factors related to inadequate supervisory procedures. These included (i) inadequate branch office procedures that, among other things, failed to address employees' handling of firm documents, such as new account applications, letters of authorization, and variable annuity forms; (ii) an inadequate system for implementing inspections; and (iii) a lack of adequate education provided to branch employees concerning the policies and procedures relating to the proper handling of branch office documents. Moreover, Western Region managers communicated with branch office managers in such a way that led some employees to believe that they should alter or destroy branch documents to achieve good inspection results. Thus, Fidelity Brokerage had inadequate policies, procedures, and systems that would reasonably be expected to prevent and detect the improper alteration and destruction of documents, and therefore, failed reasonably to supervise its employees within the meaning of Section 15(b)(4)(E) of the Exchange Act.
In determining to accept the Offer, the Commission considered remedial acts promptly undertaken by Respondent and cooperation afforded the Commission staff.
In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions specified in Respondent Fidelity Brokerage's Offer.
Accordingly, it is hereby ORDERED:
A. Pursuant to Section 15(b)(4) of the Exchange Act, Respondent is censured.
B. Pursuant to Section 21C of the Exchange Act, Respondent shall cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Exchange Act and Rule 17a 4 thereunder.
C. Respondent shall, within ten days of the entry of this Order, pay the amount of $1,000,000. Respondent shall make this payment as follows: pursuant to Section 21B of the Exchange Act, Respondent shall pay a civil money penalty in the amount of $1,000,000 to the United States Treasury. Such payment to the U.S. Treasury shall be: (A) made by United States postal money order, certified check, bank cashier's check or bank money order; (B) made payable to the Securities and Exchange Commission; (C) hand-delivered or mailed to the Office of Financial Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (D) submitted under cover letter that identifies Fidelity Brokerage's name as a Respondent in these proceedings, the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Michele Wein Layne, Assistant Regional Director, Pacific Regional Office, Securities and Exchange Commission, 5670 Wilshire Boulevard, 11th Floor, Los Angeles, California 90036. The Commission acknowledges that pursuant to Respondent's agreement with the New York Stock Exchange in related proceedings, Respondent will pay a fine in the amount of $1,000,000 to the New York Stock Exchange.
By the Commission.
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