finra

FINRA

 

For Release:
Contacts:
Tuesday, May 8, 2007
Nancy Condon (202) 728-8379
Herb Perone (202) 728-8464

 



NASD Fines Two Fidelity Broker Dealers $400,000 for Distributing Misleading Sales Literature About Systematic Investment Plans Sold to Military Personnel

Washington, D.C. — NASD announced today that it has fined two Fidelity broker-dealers $400,000 for preparing and distributing misleading sales literature promoting Fidelity's Destiny I and II Systematic Investment Plans, which were sold primarily to U.S. military personnel. Issuance and sales of new systematic investment plans (also known as periodic payment plans), which typically require investors to make a fixed number of monthly payments over a 10- to 15-year period, were prohibited by Congress last fall. Previously sold plans remain in force.

As part of the settlement, for the next five years, the two broker-dealers - Fidelity Investments Institutional Services Company, Inc. of Smithfield, RI and Fidelity Distributors Corporation of Boston - are required to notify Destiny Plan holders who want to increase their investments in existing Destiny Plans that additional shares of the underlying fund can be purchased outside the Destiny Plans without paying the additional creation and sales charges of up to 50 percent on the first year's payments.

"NASD's advertising rules are designed to protect investors by prohibiting misleading sales literature and other misleading communications," said James S. Shorris, NASD Executive Vice President and Head of Enforcement. "In this case, the Fidelity Destiny Plans were sold using various performance charts and data that presented a misleading picture of the plans' performance. These failures were aggravated by the fact that the plans were sold primarily to military personnel, who often have limited time to study the marketing materials for investment products. And these particular products involve complex or unique features that may not be fully understood by the customers to whom they are offered or by the brokers who recommend them."

NASD found that between January 2003 and January 2006, the two broker-dealers violated NASD advertising rules by preparing and distributing various pieces of misleading sales literature. For instance, from May 2003 through January 2006, the Fidelity broker-dealers prepared and distributed a brochure entitled "Time is Money" that included misleading performance claims about the Destiny Plans. According to "mountain charts" contained in the brochures, Destiny Plans significantly outperformed the S&P 500 Index over a 30-year period. But during the most recent 10- and 15-year periods—the time frame most relevant to current and prospective investors - Destiny Plans substantially underperformed the S&P 500 Index. The 30-year time period masked the underperformance of the Destiny Plans over the most recent 15 years.

The brochures also showed Destiny Plans' average annual total returns for 1, 5 and 10 years as well as the life of the Plan, without showing comparable returns for the S&P 500 Index. Again, this created the misleading impression that Destiny outperformed the S&P 500 Index throughout the periods shown. The comparable S&P 500 Index average annual total returns would have shown that the S&P 500 Index significantly outperformed Destiny during the more current time periods.

Finally, the broker-dealers used the performance of Destiny Plan Class O shares in these charts, when new Plan investors could only purchase Class N shares. Class N shares did not perform as well as Class O shares because of higher ongoing expenses. The broker-dealers prepared and sent over 10,000 copies of these brochures to Destiny retail brokers or their registered representatives to use them with both prospective investors as well as current Plan holders.

NASD also found that in May 2003, the Fidelity broker-dealers prepared and distributed a misleading Destiny newsletter to over 325,000 Destiny Plan holders. The newsletter included a mountain chart showing Destiny I Plan performance. While the chart showed Plan performance, Fidelity disclosed the average annual total returns for the underlying mutual fund portfolio, rather than for the Plan. Because Plan holders paid a 50 percent upfront sales charge on each of the first year's payments and a continuing sales charge on each additional payment until plan payments were completed, the average annual total returns for the Plans were significantly lower than that of the underlying funds. NASD further found that Fidelity did not adequately supervise the review of this Destiny sales literature in light of the unusual features of the Destiny products.

The $400,000 fine will be paid to the NASD Investor Education Foundation (a tax-exempt, non-profit organization) to help fund its Military Financial Education Campaign, launched in February 2006. The NASD Investor Education Foundation will use the funds to support educational programs, materials and research to equip members of the United States military and their families with the knowledge and skills necessary to make informed financial decisions. More information about the ongoing, global campaign can be found at www.SaveAndInvest.org.

Fidelity Investments Institutional Services Company and Fidelity Distributors Corporation settled the action without admitting or denying the charges, but consented to the entry of NASD's findings.

Investors can obtain more information about, and the disciplinary record of, any NASD-registered broker or brokerage firm by using NASD's BrokerCheck. NASD makes BrokerCheck available at no charge. In 2006, members of the public used this service to conduct more than 4.7 million searches for existing brokers or firms and requested more than 207,000 reports in cases where disclosable information existed on a broker or firm. Investors can link directly to BrokerCheck at www.nasd.com/brokercheck. Investors can also access this service by calling (800) 289-9999.

NASD is the leading private-sector provider of financial regulatory services, dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business - from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and registered firms. For more information, please visit our Web site at www.nasd.com.