## Facts

- Fidelity Management & Research Company and FMR Co., Inc. (collectively, Fidelity) were SEC-registered investment advisers that managed portfolios for the Fidelity mutual funds and other advisory clients.
- Fidelity traders placed trades through broker-dealers seeking to obtain or retain Fidelity’s brokerage business.
- Over a multi-year period, Fidelity senior executives and equity traders accepted extensive travel, entertainment, and gifts from broker-dealers that sought and received Fidelity trading business.
- Some Fidelity traders directed client trades to broker-dealers that employed their family members or significant others, or otherwise had personal connections to the traders.
- Fidelity did not disclose these gift/entertainment and trade-steering conflicts to advisory clients, in public filings, or to the independent trustees/boards of the Fidelity funds.
- Fidelity lacked and failed to implement adequate controls and written policies and procedures reasonably designed to prevent these conflicts and related federal securities law violations.
- The SEC instituted administrative and cease-and-desist proceedings; Fidelity settled on a “without admitting or denying” basis (except as to jurisdiction).

## Issues

1. Whether an investment adviser violates Advisers Act § 206 by failing to disclose material conflicts arising from broker-provided travel, entertainment, gifts, and trade-routing influenced by personal relationships.
2. Whether an adviser to registered funds violates duties under the Investment Company Act by withholding material brokerage-related conflicts from fund boards and shareholders.
3. Whether failing to adopt and implement reasonably designed compliance policies and procedures regarding gifts, entertainment, and brokerage selection constitutes an actionable violation warranting remedial sanctions.
4. What remedial sanctions and undertakings are appropriate to address conflicts in brokerage selection and compliance program deficiencies.

## Decision

- The SEC issued an administrative cease-and-desist order against Fidelity based on Commission findings accepted for settlement purposes.
- The SEC found Fidelity allowed advisory personnel to accept extensive travel, entertainment, and gifts from broker-dealers seeking trading business, without sufficient controls.
- The SEC found Fidelity permitted trade-steering to broker-dealers with personal ties to Fidelity traders, creating undisclosed conflicts in brokerage selection.
- The SEC found Fidelity failed to disclose these conflicts to advisory clients, fund independent trustees, and the investing public through disclosure documents.
- The SEC found Fidelity failed to adopt and implement written policies and procedures reasonably designed to prevent violations concerning gifts/entertainment and brokerage selection.
- The SEC imposed cease-and-desist relief, remedial undertakings focused on enhancing compliance and oversight, and monetary sanctions.

## Legal Principles

- Investment advisers are fiduciaries and must make full and fair disclosure of material conflicts of interest, including conflicts affecting brokerage selection and trade routing.
- Receipt of substantial broker-provided travel, entertainment, or gifts by advisory personnel can create material conflicts requiring effective controls and disclosure.
- Routing trades to brokers based on personal relationships (including employment of relatives or significant others) presents conflicts that must be identified, mitigated, and disclosed.
- Advisers and fund advisers must maintain and implement written policies and procedures reasonably designed to prevent violations of the federal securities laws, including in high-conflict areas such as gifts/entertainment and brokerage practices.
- Failure to provide material conflict information to fund independent trustees can breach obligations associated with governance and oversight of registered investment companies.

## Conclusion

The SEC determined that Fidelity’s acceptance of broker-provided benefits and trade-steering based on personal ties created material, undisclosed conflicts and reflected inadequate compliance controls, warranting cease-and-desist relief, remedial undertakings to strengthen policies and oversight, and monetary sanctions.


In re Fidelity Mgmt. & Rsch. Co., Investment Advisers Act Release No. 2713 (S.E.C. 2008)