Fidelity Fined for Misleading Troops

NASD  |  May 11, 2007

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.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.

Read the rest of the article at Military.com.

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~ by Brad Edwards on May 17, 2007.

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