As mighty Fidelity Investments found out Wednesday, what used to be accepted financial industry practice is no longer allowed.
The market leader in U.S. mutual funds paid an $8-million (U.S.) fine to settle federal regulatory charges that its in-house traders accepted improper gifts from investment banks, including weekend trips on private jets and tickets to concerts and sports events, in exchange for directing business to the dealers. While the extent of this entertainment was shocking, the concept of taking a portfolio manager to an event one night, and getting orders the next morning is a well-established tradition on the Street.
The four-year Securities and Exchange Commission investigation of Fidelity and 13 current and former employees - including superstar Peter Lynch -ended with the fund company neither admitting nor denying guilt. Mr. Lynch wrote a cheque to cover the price of tickets he received.
However, damage to reputations at Boston-based Fidelity was huge, as the SEC unearthed broker-sponsored parties that included prostitutes and dwarf-tossing, and an array of incriminating e-mails, with a Fidelity trader clearly accepting Celtics tickets in exchange for Cisco trades in one well-documented exchange.
This settlement is going to put an industry-wide damper on the entertainment that brokerage houses supply to institutional clients. However, it won’t lead to new rules, but rather, enforcement of measures that were already on the books. At a time they were receiving all sorts of freebies, Fidelity traders weren’t allowed to accept gifts of more than $100 a year. Most Canadian money managers work on the same standard, which is also enshrined in the CFA code of conduct.
