Will an Ex-Fidelity Advisor's Reg BI Suit Catch the SEC's Eye?
What You Need to Know
An advisor sued Fidelity, saying it fired him after he blew the whistle on its attempts to pressure advisors to sell products not in clients’ best interest.
The SEC or law enforcement agencies could investigate the claim, lawyers say.
The case could have implications for the broader financial services industry.
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A financial advisor’s whistleblower lawsuit alleging Fidelity Investments prioritized its own profits over clients’ best interests could potentially prompt the Securities and Exchange Commission to investigate.
In fact, legal experts suggest, the lawsuit could potentially lead to a probe and civil or criminal charges that could have implications for the industry more broadly.
“Fidelity is going to have a fight on its hands here. And there have been some whistleblower cases in the last 20 years that have been whoppers. Companies have taken big losses,” Dan Meyer, partner at Tully Rinckey in Washington, told me in an interview.
“There’s few and far between, but they’re enough to remind everybody that … there’s a potential that the company could take a big hit,” he said.
Reg BI Violations Alleged
In the lawsuit, filed in early May in U.S. District Court in Dallas, Michael Maeker, who spent 24 years with Fidelity, alleges the financial giant fired him in retaliation for reporting company practices he says put the firm’s profits over customers’ finances.
Fidelity repeatedly breached its fiduciary obligation by improperly pressuring Maeker and other advisors to push their clients to move assets from low-fee investments such as index funds to higher-fee, “Tier 3” managed money products, including separately managed accounts, he contends.
Maeker alleges he was pressured to push clients into unsuitable or ill-advised investments.
Fidelity’s conduct over five years violated the SEC’s Regulation Best Interest, which governs broker-dealer conduct, and other laws related to fraud on shareholders, according to the complaint, which also contends the company violated the Sarbanes-Oxley Act’s anti-retaliation and whistleblower protections.
The Reg BI violations at Fidelity came to an abrupt halt last year after Maeker’s whistleblowing exposed them and after he filed a Sarbanes-Oxley complaint, he alleges.
Fidelity has said it “denies all the allegations made by this former employee, including about his termination, and will defend itself vigorously.” On May 29, the company received a 30-day extension, to July 5, to file its legal answer to the lawsuit.
Potential Industry Ripple Effects
Legal experts see risks for Fidelity in the case itself and in the potential for regulators to investigate the firm’s alleged conduct.
If material comes out at trial showing Fidelity violated SEC rules, the case also could prompt an investigation, Meyer said.
The SEC can pursue only civil charges against firms and individuals but may refer potential criminal cases to law enforcement agencies and conduct probes in tandem with them.
Frank Xu, senior litigation counsel with Sanford Heisler Sharp in Washington, said he was curious to see how Fidelity would deal with the allegations that they violated Reg BI. He too cited the potential for action beyond the lawsuit.
“Regulators may look at this complaint and begin their own investigation into Fidelity, and a much larger fine can come that way in comparison to this suit,” Xu told me via email. He noted the complaint cites declarations, emails and audio recordings as evidence the company pressured advisors to push clients into Tier 3 investments.
The suit also cites “hero sheets” that Fidelity allegedly distributed comparing different branch managers’ Tier 3 numbers.
“There are significant risks for the company for taking a case like this to trial,” Xu said, citing the potential for having facts emerge that would demonstrate the company has attempted to silence whistleblowers to protect its own bottom line.
Such a case “attracts a lot of unwanted attention for the company” beyond just the alleged retaliation “because now they have to deal with the underlying conduct that the whistleblower complained about, as well,” Xu said. “Regulators may now look into Fidelity’s conduct surrounding Reg BI, if they haven’t already started such a process.”
