Fidelity has agreed to settle with Finra and pay a $375,000 fine over alleged sales violations involving the Fidelity Ultra Short Bond Fund from December 2006 through December 2008.
Finra alleged that
Fidelity Investments' two broker-dealers, Fidelity Brokerage Services LLC and
Fidelity Investments Institutional Services Co. Inc., produced misleading sales materials and advertising for the fund, and lack adequate supervisory procedures.
The
Financial Industry Regulatory Authority Inc. signed off on the settlement last week.
"The fund invested in large amounts of risky and high-yielding asset- and mortgage-backed securities," Finra said in the settlement.
The fund began to lose value in June 2007 as the subprime crisis unfolded, according to the settlement. Yet sales materials continued to state that the fund held "high-credit-quality" fixed-income securities.
Prior to June 2007, the fund's net asset value was around $10 per share, but by April 2008, the price had fallen to $8.25.
Over the course of 2006 and 2007, customers invested nearly $1 billion in the fund, Finra said.
Separately, in May, a federal court approved a settlement in a related class action filed in 2008 against several Fidelity units. Fidelity agreed to pay $7.5 million to the bond fund investors in that suit.
"Fidelity takes its compliance obligations very seriously, and subsequent to the events in the [Finra settlement], the firm has taken several steps to address the advertising issues," Fidelity spokesman Vincent Loporchio wrote in an e-mail.
Fidelity settled the class action "to avoid the distraction to the firm of further litigation," he added. "We continue to believe the claims are entirely without merit."
The majority of the fund's subprime-mortgage investments were rated AAA and AA, Mr. Loporchio said, but suffered from the "unusually challenging market environment" during the crisis.
In a similar case settled last year, The
Charles Schwab Corp. agreed to pay nearly $119 million to end charges filed by regulators over its YieldPlus bond fund, which imploded during the crisis. In a separate class action claim finalized in 2010, Schwab agreed to pay investors another $235 million.
At its peak in 2007, the YieldPlus fund had $13.5 billion in assets.
