Fidelity Management & Research Company and FMR Co., Inc., Exams of Business

Download Fidelity Management & Research Company and FMR Co., Inc. and more Exams Business in PDF only on Docsity! _______________________________ UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION INVESTMENT ADVISERS ACT OF 1940 Release No. 2713 / March 5, 2008 INVESTMENT COMPANY ACT OF 1940 Release No. 28185 / March 5, 2008 ADMINISTRATIVE PROCEEDING File No. 3-12976 ) In the Matter of ) ORDER INSTITUTING ADMINISTRATIVE ) AND CEASE-AND-DESIST PROCEEDINGS, FIDELITY MANAGEMENT & ) MAKING FINDINGS, AND IMPOSING RESEARCH COMPANY and ) REMEDIAL SANCTIONS AND A FMR CO., INC., ) CEASE-AND-DESIST ORDER PURSUANT TO ) SECTIONS 203(e) AND 203(k) OF THE ) INVESTMENT ADVISERS ACT OF 1940 ) AND SECTIONS 9(b) AND 9(f) OF THE Respondents. ) INVESTMENT COMPANY ACT OF 1940 ______________________________ ) I. The Securities and Exchange Commission (“Commission”) deems it appropriate and in the public interest that public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 (“Advisers Act”) and Sections 9(b) and 9(f) of the Investment Company Act of 1940 (“Investment Company Act”), against Fidelity Management & Research Company (“FMR”) and FMR Co., Inc. (“FMR Co.”) (collectively “Respondents” or “Fidelity”). II. In anticipation of the institution of these proceedings, Respondents have submitted an Offer of Settlement (the “Offer”) that the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission’s jurisdiction over them and the subject matter of these proceedings, which are admitted, Respondents consent to the entry of this Order Instituting Administrative and Cease-and- Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 and Sections 9(b) and 9(f) of the Investment Company Act of 1940 as set forth below. III. On the basis of this Order and Respondents’ Offer, the Commission finds1 that: A. RESPONDENTS 1. FMR is a privately held Massachusetts corporation registered with the Commission as an investment adviser pursuant to Section 203(c) of the Advisers Act, with its principal place of business in Boston, Massachusetts. FMR is a wholly owned subsidiary of FMR LLC, a privately held Delaware limited liability company. FMR is an adviser to various institutional clients and has approximately $1.25 trillion in assets under management. FMR’s institutional clients include a group of approximately 350 registered investment companies marketed under the “Fidelity Investments” trade name and managed by FMR and its affiliates (hereafter “the Fidelity Funds”). 2. FMR Co. is a privately held Massachusetts corporation registered with the Commission as an investment adviser pursuant to Section 203(c) of the Advisers Act, with its principal place of business in Boston, Massachusetts. FMR Co. is a wholly owned subsidiary of FMR and provides portfolio management services as a sub-adviser to certain clients of FMR, including the Fidelity Funds. B. OTHER RELEVANT PARTIES2 3. Scott E. DeSano, age 47, lives in Boston, Massachusetts. He was associated with FMR Co. from 1991 to July 2005, and was its senior vice president in charge of global equity trading from 1996 until he was reassigned to an affiliate of FMR in July 2005. From at least January 2002 through October 2004, he supervised Fidelity’s Boston domestic equity trading desk (“Equity Trading Desk”) and other equity trading operations. In all, DeSano supervised more than 1 The findings herein are made pursuant to Respondents’ Offer of Settlement and are not binding on any other person or entity in this or any other proceeding. 2 The persons identified by name below are respondents in other administrative and cease-and-desist proceedings instituted today. See In the Matter of Scott E. DeSano, Thomas H. Bruderman, Timothy J. Burnieika, Robert L. Burns, David K. Donovan, Edward S. Driscoll, Jeffrey D. Harris, Christopher J. Horan, Steven P. Pascucci, and Kirk C. Smith; In the Matter of Peter S. Lynch; In the Matter of Bart A. Grenier; and In the Matter of Marc C. Beran. 2 excursions to the Super Bowl, family vacations to Bermuda, Nantucket and the Caribbean, golf outings at exclusive clubs in Florida and South Carolina, weekends in Las Vegas, lodging at fine hotels, and even an extravagant, three-day bachelor party for Bruderman in Miami. Brokers also provided the Fidelity executives and traders with gifts including premium tickets to the World Series, the U.S. Open, Wimbledon, Rolling Stones concerts, and dozens of other sporting events and concerts. In addition, certain traders accepted illegal drugs from brokers and one trader’s illegal gambling was facilitated by a broker.6 17. The ten traders allowed the receipt of travel, entertainment and gifts to influence their selection of brokers to handle transactions for Fidelity’s clients. As one trader commented to another, “Word is out that order flow is for sale.” In addition, certain traders routinely sent transactions to brokers who were members of their families or brokers with whom they had a romantic relationship.7 18. DeSano, who supervised Fidelity’s equity trading operations, personally accepted travel, entertainment and gifts from brokers who sought and obtained securities transactions for Fidelity’s clients. He solicited tickets from brokers for himself and to satisfy requests from his supervisor, Grenier. He accompanied certain traders on several trips by private jet paid for by brokers, including attending part of Bruderman’s bachelor party in Miami, and traders told him about some of the other private jet trips and tickets they received from brokers. He also knew that certain traders directed transactions to brokers who were members of their family or with whom they had a romantic relationship. Nevertheless, DeSano failed to monitor the traders’ receipt of travel, entertainment and gifts in any systematic way and failed to take reasonable steps to ensure that they were seeking best execution or complying with Fidelity’s policy concerning its employees’ receipt of gifts and gratuities. 19. Under Section 17(e)(1) of the Investment Company Act, affiliated persons of a registered investment company, such as Fidelity executives and traders, are prohibited from accepting “from any source any compensation (other than a regular salary or wages from such registered company) for the purchase or sale of any property” of the investment company. The objective of Section 17(e)(1) is to prevent persons affiliated with registered investment companies from having conflicts of interest impair their judgment and loyalty. A violation of Section 17(e)(1) of the Investment Company Act is complete upon receipt of the compensation. During the Relevant Period, two Fidelity executives (DeSano and Grenier) and ten Fidelity traders (Beran, Bruderman, Burnieika, Burns, Donovan, Driscoll, Harris, Horan, Pascucci and Smith) received compensation in violation of Section 17(e)(1) of the Investment Company Act in the form of 6 The primary recipient of drugs was Bruderman, who received ecstasy pills and marijuana from brokers on a number of occasions. 7 Two traders not named in this Order sent Fidelity business to brokers with whom they were having romantic relationships. 5 travel, entertainment and gifts paid for by brokers who sought and obtained from those traders securities transactions for Fidelity’s clients. In addition, another Fidelity executive (Lynch) caused two Fidelity traders’ violations of Section 17(e)(1). Fidelity failed to adopt and implement a system of controls sufficient to detect, deter, and prevent the receipt by these executives and traders of travel, entertainment and gifts paid for by brokers as described herein. As a result, Fidelity failed reasonably to supervise the executives and traders, within the meaning of Section 203(e)(6) of the Advisers Act, with a view to preventing their violations of Section 17(e)(1) of the Investment Company Act. 20. Under Section 206 of the Advisers Act, an investment adviser has a fiduciary duty to seek best execution for its clients’ securities transactions – that is, to seek the most favorable terms reasonably available under the circumstances. In determining whether an adviser is seeking best execution, the key criterion is whether the adviser selects the transaction which “represents the best qualitative execution for the managed account.”8 During the Relevant Period, Fidelity allowed certain employees’ receipt of travel, entertainment and gifts and certain employees’ family or romantic relationships to enter into the selection of brokers. Accordingly, Fidelity willfully violated Section 206(2) of the Advisers Act, resulting in the substantial possibility of higher execution costs for Fidelity’s advisory clients.9 21. Under Section 206 of the Advisers Act, an investment adviser has a fiduciary duty to disclose all material conflicts of interest to its advisory clients. During the Relevant Period, Fidelity failed to disclose to its advisory clients the conflicts of interest arising from the receipt by certain Fidelity executives and traders of travel, entertainment and gifts from, and certain traders’ family and romantic relationships with, brokers who sought and obtained securities transactions for Fidelity’s clients, and failed to disclose that such travel, entertainment, gifts and relationships became additional factors in the traders’ selection of brokers. Accordingly, Fidelity willfully violated Section 206(2) of the Advisers Act. 22. Under Sections 204, 206 and 207 of the Advisers Act and Rule 204-1 thereunder and Section 34(b) of the Investment Company Act, an investment adviser may not make materially false and misleading statements in public disclosure documents, such as an 8 Interpretive Release Concerning the Scope of Section 28(e) of the Securities Exchange Act of 1934, Exchange Act Rel. No. 23170, 1986 SEC LEXIS 1689, at *38 (Apr. 23, 1986) (“1986 Soft Dollar Release”); see also Market 2000 Report: Study V, Best Execution, 1994 SEC LEXIS 136, at *42 n.65 (“Market 2000 Report”) (“[M]oney managers in fulfilling their duties of best execution . . . must evaluate periodically the performance of the broker-dealers that execute their transactions.”); Renberg Capital Management, Inc., Advisers Act Rel. No. 2064, 2002 WL 31174796, *2 (Oct. 1, 2002); Portfolio Advisory Services, LLC, Advisers Act Rel. No. 2038, 2002 WL 1343823, *2 (June 20, 2002). 9 “Willfully” as used in this Order means intentionally committing the act that constitutes the violation. See Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000); Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965). There is no requirement that the actor also be aware that he is violating one of the Rules or Acts. Id. 6 investment adviser’s Form ADV and a registered investment company’s prospectus and statement of additional information (“SAI”). During the Relevant Period, Fidelity’s Forms ADV and the SAIs which it prepared for the Fidelity Funds stated that Fidelity selected brokers for its clients’ transactions based on an itemized list of factors but failed to include the additional significant factors considered by certain traders – their receipt of travel, entertainment and gifts from brokers and their family or romantic relationships with brokers. As a result, Fidelity willfully violated Sections 204, 206(2) and 207 of the Advisers Act and Rule 204-1 thereunder and Section 34(b) of the Investment Company Act. 23. On behalf of Fidelity, DeSano made presentations to committees of the trustees of the Fidelity Funds in which he too identified the factors that Fidelity used in selecting brokers. DeSano also told the trustees that Fidelity required brokers to compete for its brokerage business based on the quality of their trade execution. Those statements were false and misleading because DeSano failed to disclose (1) that certain Fidelity traders selected brokers for Fidelity’s business based on additional significant factors of which he was aware – travel, entertainment and gifts from brokers and family or romantic relationships with brokers, and (2) that brokers competed for Fidelity’s business based on those additional factors as well. As a result, Fidelity willfully violated Section 206(2) of the Advisers Act. 24. Under Section 204 of the Advisers Act and Rule 204-2 thereunder, an investment adviser is required to make and keep true, accurate and current books and records relating to its investment advisory business, including originals or copies of certain documents reflecting its communications with brokerage firms relating to the placing or execution of orders to purchase or sell securities. During the Relevant Period, Fidelity traders used an electronic messaging network supplied by Bloomberg L.P. (“Bloomberg”) to communicate with brokers. Fidelity failed to make and keep true, accurate, and current originals or copies of such messages. As a result, Fidelity willfully violated Section 204 of the Advisers Act and Rules 204-2(a)(7)(iii) and 204-2(g) thereunder. Background on Fidelity’s Equity Trading Desk 25. Fidelity manages one of the largest mutual fund complexes in the United States. Fidelity equity traders buy and sell millions of shares of stock every day for the Fidelity Funds and other institutional clients. As an investment adviser, Fidelity has a fiduciary duty to seek best execution for its clients’ securities transactions and to disclose to its clients all material facts concerning conflicts of interest. 26. The Fidelity Funds and certain of Fidelity’s other institutional clients’ accounts are managed by portfolio managers who make investment decisions on their behalf. The portfolio managers send their orders to equity traders, who are responsible for selecting brokers to handle the transactions. During the Relevant Period, the Equity Trading Desk bought and sold more than 73 billion shares of equity securities (nearly 26 billion shares per year) with a total principal of more than $1.4 trillion (nearly $500 billion per year). Fidelity’s 7 from $1,000 to $7,700 each delivered straight to their homes), and other costly items such as entry to a racing school (over $5,000) and a humidor filled with cigars (approximately $1,300). The Individual Executives and Traders 35. DeSano received more than $145,000 worth of travel, entertainment and gifts from brokers during the Relevant Period. He received the personal use of Quinn’s private jet for at least two trips, and he went on at least six private jet trips with brokers, primarily Quinn. The trips by private jet included the “Fall Classic” in Las Vegas and Mexico in November 2002, Bruderman’s bachelor party in Miami in March 2003, and golf trips to locations such as Sea Island, Georgia, West Palm Beach, Florida, and the Winged Foot Golf Club in Mamaroneck, New York. Brokers also gave DeSano nearly fifty tickets to more than twenty events, including several Bruins, Celtics, Patriots and Red Sox playoff games. 36. Grenier received approximately $38,500 worth of tickets from brokers during the Relevant Period. The tickets were to approximately twenty events, including a Super Bowl ticket package worth approximately $9,000 and premium seats to numerous Celtics and Red Sox games. On several occasions, Grenier asked DeSano to get the tickets for him, and DeSano obliged him by procuring the tickets from brokers who sought and obtained securities transactions for Fidelity. 37. Lynch was the portfolio manager of Fidelity’s Magellan Fund from 1977 to 1990. During the last five years of his tenure at Magellan, Burns was one of the traders assigned to handle transactions for the Magellan Fund. During the Relevant Period, Lynch periodically asked Burns to get him tickets to concerts, theater and sporting events – often to sold-out events. Lynch knew that Burns obtained the tickets from brokers handling securities transactions for Fidelity. (On one occasion, Lynch obtained tickets to a Santana concert from Harris, who had taken his call when Burns was out.) From 1999 through October 2004, Lynch received tickets worth approximately $15,948 that Burns or Harris had obtained from brokers, and he did not reimburse. He received 61 tickets to approximately one dozen sporting, theater and concert events, including fourteen, three-day passes to the Ryder Cup golf tournament in Brookline, Massachusetts in 1999, eleven tickets to a U2 concert, and at least six tickets to the Ryder Cup golf tournament in Michigan in 2004. In addition to Burns and Harris, at least seven other members of the Equity Trading Desk were aware during the Relevant Period that Lynch obtained tickets to events from brokers through the Equity Trading Desk. Each of those members of the Equity Trading Desk accepted gifts for themselves from brokers. 38. Beran received more than $11,000 worth of travel, entertainment and gifts from brokers during the Relevant Period. These included tickets to out-of-town theater and local professional sporting events that the brokers did not attend. Beran and his family also went on two trips to Bermuda with a broker who paid for the family’s luxury hotel accommodations, associated expenses, and for one trip, their commercial airfare. 10 39. Bruderman received more than $450,000 worth of travel, entertainment and gifts from brokers during the Relevant Period.13 One example was his bachelor party in Miami, Florida in March 2003. Bruderman solicited certain brokers to arrange and pay for the event, and the brokers complied – at a total cost of approximately $160,000. The festivities included private jet travel, luxury accommodations at the Breakers Hotel, a chartered yacht, golf, a limousine, and other entertainment such as expensive dinners and strip clubs. Brokers hired two women to entertain the attendees at the party and provided a bag filled with illegal drugs (ecstasy pills) to Bruderman.14 DeSano, who attended the bachelor party and flew to Miami on the private jet with Bruderman, several brokers, and the two women, believed that the women hired by the brokers were prostitutes. In addition to his bachelor party and other wedding- related expenses, brokers paid all or part of Bruderman’s share of approximately 25 other trips. Bruderman obtained private jet travel on more than twenty of those occasions. The trips included such destinations as the Super Bowl (twice), the Caribbean, and Cabo San Lucas, Mexico (on the November 2002 “Fall Classic”). On approximately ten of the trips, brokers were not present and simply provided Bruderman and/or his fiancée with the use of a private jet. These included trips to Puerto Rico, Florida, and his honeymoon in Los Angeles. Brokers also provided Bruderman with lodging on at least fourteen occasions, airfare on commercial jets on at least six occasions, and other gifts such as entry to a racing school (over $5,000), thousands of dollars worth of wine, a humidor with cigars ($1,300), and limousine service. Finally, brokers gave Bruderman at least thirty tickets to at least seven events, including the U.S. Open tennis tournament and front-row seats at a Dave Matthews concert. Bruderman failed to inform DeSano or any other Fidelity manager of his receipt of illegal drugs from brokers. 40. Burnieika received more than $55,000 worth of travel, entertainment and gifts from brokers during the Relevant Period, mostly consisting of premium tickets to professional sporting events. Indeed, brokers gave Burnieika approximately 175 tickets to more than fifty events that the brokers did not attend, including several Celtics and Red Sox playoff games, numerous other Celtics and Red Sox games, and concerts by the Rolling Stones and Bruce Springsteen. 13 One broker at a firm that provided Bruderman with extravagant trips and gifts expressed the firm’s attitude as, “Whatever Brudy wants, Brudy gets.” 14 Brokers sometimes offered illegal drugs to Bruderman. For example, in February 2002, a broker through whom Bruderman executed securities transactions for Fidelity clients sent him an email asking, “U want beans.” (Certain traders and brokers used slang such as “beans” and “Scooby snacks” to refer to ecstasy.) On other occasions, Bruderman solicited drugs from brokers. For example, in January 2004, he asked a broker, “Long any snacks?” The broker responded, “For the Superbowl??? I most likely will b able to take care of that.” Bruderman replied, “I would like to order 10 if you have a guy?” All communications among DeSano, traders and brokers cited in this Order are from the email network maintained by Bloomberg for Fidelity and are quoted with their original spelling and punctuation. Brackets are used to clarify abbreviations or other terms and to indicate where names have been omitted. 11 Burnieika also went on ten trips with brokers to such destinations as the Super Bowl, Las Vegas, and Aspen, Colorado. Four of the trips were by private jet, while the other six trips were by commercial jet with brokers who paid for some of his lodging and other travel and entertainment expenses. 41. Burns received more than $180,000 worth of travel, entertainment and gifts from brokers during the Relevant Period (not counting the tickets that he obtained for Lynch). Burns received more than 190 tickets to more than forty events that the brokers did not attend, plus fourteen tickets for Burns’ friends to attend three events that Burns attended with brokers. Burns received at least $140,000 of tickets and other gifts from Quinn at Jefferies, and Quinn did not attend any of the events for which he provided tickets. For example, over a three-year period, Quinn spent more than $100,000 so that Burns could attend the Wimbledon tennis tournament. In 2002 and 2003, Quinn simply gave Burns tickets to the tournament. In 2004, he not only gave Burns tickets that cost more than $38,000, but he also paid for Burns and his friends to stay at the Lanesborough Hotel in London, at a cost of nearly $13,000. Quinn also had cases of expensive wine delivered to Burns’ home as Christmas gifts – at a cost of more than $5,900 in December 2002 and more than $7,700 in December 2003. 42. Donovan received more than $270,000 worth of travel, entertainment and gifts from brokers during the Relevant Period, mostly consisting of trips by private jet to the Super Bowl, Las Vegas, the Bahamas, Florida, and other vacations. In total, brokers paid all or most of Donovan’s expenses on 24 trips, including travel by private jet to at least sixteen destinations, first- class flights on the Concorde on at least two occasions, and lodging on eighteen occasions. For example, in June 2002, one broker took Donovan to Paris for the French Open tennis tournament and paid for his lodging at the Hotel George V, and in August 2003, the same broker took Donovan and his wife to London for the Wimbledon tennis tournament and paid for their lodging in the Ritz Hotel. On six occasions, the broker did not attend but simply provided Donovan with the use of a private jet for himself and sometimes his family. In addition, brokers gave Donovan a case of wine valued at approximately $1,000 on two separate occasions, as well as more than sixty tickets to more than twenty events. 43. Driscoll received more than $45,000 worth of travel, entertainment and gifts from brokers during the Relevant Period. This included the exclusive use of Quinn’s private jet, as well as car service, for a family vacation to DisneyWorld in Florida, at a cost to Jefferies of approximately $25,000. Driscoll also went on four trips with brokers to the Super Bowl and Las Vegas, two of which included private jet travel and three of which included lodging. Brokers also gave Driscoll more than 55 tickets to at least sixteen events that the brokers did not attend, primarily Celtics games. In addition, one broker facilitated Driscoll’s illegal gambling by delivering his bets to a bookie and even, at one point, by initially covering Driscoll’s $10,000 debt to the bookie. Driscoll failed to inform DeSano or any other Fidelity manager of his illegal gambling through a broker. 12 51. The three Fidelity executives and ten traders repeatedly violated Fidelity’s gifts and gratuities policy when they accepted travel, entertainment and gifts paid for by brokers who sought and obtained securities transactions from Fidelity. For example: a. Many of the travel and entertainment events and gifts that the Fidelity employees received from brokers were worth more than $100, yet none of the employees ever submitted a written request for approval. b. The Fidelity employees frequently solicited brokers for tickets to a particular event. In fact, they sometimes asked for tickets so close to the date of the event that the brokers had to obtain the tickets from ticket agencies at exorbitant prices. c. On many occasions, the traders did not reimburse the brokers for the private jets, lodging, and other travel expenses, in violation of Fidelity’s gifts and gratuities policy. On some occasions, brokers refused to accept reimbursement checks from traders; and on other occasions, the broker accepted a check not intending to cash it and informed the trader the check was just for “paper trail” purposes. DeSano’s Failure to Supervise the Traders’ Receipt of Travel, Entertainment and Gifts under Section 17(e)(1) of the Investment Company Act 52. As Fidelity’s head of equity trading, DeSano’s duties included supervision of the traders’ compliance with applicable legal requirements and with Fidelity’s policies and procedures, including its gifts and gratuities policy. 53. DeSano knew that some traders received travel, entertainment and gifts from brokers, in part because he accompanied them on several trips, in part because he communicated regularly with Bruderman and several other traders about trading desk matters, and in part because he made sporadic attempts to have the traders tell him about their upcoming trips with brokers. For example, each year he asked the traders about their plans for the Super Bowl. 54. DeSano took only limited and ineffective steps to police the traders’ receipt of travel, entertainment and gifts from brokers. For example: a. At one point, DeSano caused Fidelity to issue credit cards to the traders so they could pay for their own business entertainment, but the traders did not use the cards or submit expenses for approval, and he did not follow up. At another point, he suggested to senior management of Fidelity that Fidelity might consider adopting a formal policy concerning its employees’ use of private jets provided by brokers and other vendors, but again he did not follow up. 15 b. In early May 2004 (after a weekend when brokers had taken Harris to Las Vegas and Burnieika and Horan to Florida), he announced that traders would have to notify him in advance about all trips with brokers. A month later, he announced that traders would have to pay their own way on all future events with brokers. However, he did not enforce these policies, and traders continued to go on trips without informing him in advance and without reimbursing the brokers. For example, Quinn took DeSano and Bruderman golfing on Nantucket in June 2004, providing them with hundreds of dollars worth of golf items and arranging for Bruderman to take a private jet home from Nantucket. Similarly, Quinn took DeSano, Harris and his wife, and Horan to a charity golf event on Nantucket in August 2004. Quinn provided lodging for the group at his home, and gave the Harrises and Horan the use of his private jet to return to Boston. There is no evidence that the Fidelity employees reimbursed Quinn for these trips. c. DeSano instructed the traders to reimburse brokers for private jet travel at the rate for first-class commercial airfare to the same destination, but he did not require proof of reimbursement, and, as a result, the traders rarely made reimbursement to brokers for their trips on private jets. 55. Indeed, far from effectively supervising the traders’ receipt of travel, entertainment and gifts from brokers, DeSano actually made matters worse, in several respects. a. DeSano personally asked brokers for tickets or asked traders to ask brokers for tickets, sometimes for himself and sometimes for other senior Fidelity executives like Grenier, and he personally went on several trips paid for by brokers without reimbursing his full share of the expenses. His conduct sent the clear message that the traders could engage in similar activities, and because soliciting brokers for tickets and traveling at a broker’s expense were violations of Fidelity’s gifts and gratuities policy, his conduct also sent the message that the traders too could violate Fidelity’s policy with impunity. b. DeSano traveled frequently with Quinn, the most significant source of travel and gifts for the traders.15 For example, DeSano attended both the November 2002 “Fall Classic” and part of Bruderman’s bachelor party in March 2003 – two visible and extravagant excursions for which brokers picked up the tab. (Jefferies paid approximately $200,000 for the former, and several brokers including Quinn paid a total of approximately $160,000 for the latter.) c. DeSano also took steps to conceal his and others’ participation in the 2002 “Fall Classic.” In an October 2002 email to Quinn, DeSano asked, “What happens when The demoralizing effect for the trading desk of DeSano’s travels with Quinn is apparent from Pascucci’s comment to Smith in December 2003, “How can u enforce the no nepotism rule when SCD [DeSano] is such buddies with Quinn? It is absurd the one guy gets so [much] favored treatment from the head.” 16 15 I get fired for this?” Quinn responded, “SEC rule first class plane fare and we are all set.16 . . . Plus noone is allowed 2 say anything . . . Last yr never got out . . . If someone talks, we kill . . . That conversation happens first thing on the plane . . . Just a simple golf trip.” DeSano then said, “Brudy [Bruderman] will be on a trip with [his fiancée]. You [Quinn] will be trying to qualify for a tourney somewhere down south. Harris has to make something up. And what I do is no one’s G.D. business!” In a subsequent email, DeSano told Harris, “This needs to be excessively covert . . . Not even your desk can know. Make something else up.” Harris responded, “I will, but when Brudy [Bruderman] and I are out and Kevin [Quinn] is out . . . people start talking. I am going to Seattle to see [my wife’s] grandmother with her parents . . . That’s my story and I am sticking to it.” DeSano then gave Harris the cover stories for Bruderman and Quinn. Harris replied, “Sounds good.” 56. DeSano failed to monitor the traders’ receipt of travel, entertainment and gifts from brokers on any systematic basis, and he failed to take reasonable steps to enforce Fidelity’s gifts and gratuities policy or to ensure that the traders did not receive compensation from brokers for purposes of Section 17(e)(1) of the Investment Company Act. Certain traders violated Section 17(e)(1) by receiving compensation in the form of gifts, travel, and entertainment from brokers. As a result, Fidelity, through DeSano as its head of equity trading, failed reasonably to supervise the traders, within the meaning of Section 203(e)(6) of the Advisers Act, with a view to preventing their violations of Section 17(e)(1) of the Investment Company Act. Fidelity’s Failure to Supervise its Executives’ and Traders’ Receipt of Travel, Entertainment and Gifts under Section 17(e)(1) of the Investment Company Act 57. As shown above, the practice of accepting travel, entertainment and gifts paid for by brokers was well established at Fidelity throughout the Relevant Period – not just by the ten traders named above, who handled more than 50% of Fidelity’s equity trading, but also by three senior Fidelity executives with ties to the Equity Trading Desk. 58. At least nine members of Fidelity=s Equity Trading Desk were aware that Lynch – vice chairman and a director of FMR and FMR Co., interested trustee of the Fidelity Funds and former portfolio manager – solicited tickets by calling the Equity Trading Desk, primarily Burns. All nine of those employees obtained gifts that violated Fidelity=s policy. Lynch’s conduct was the subject of comment between certain traders. 59. Likewise, Grenier and DeSano – the two senior officers with primary responsibility for equity trading – personally solicited and received tickets from brokers. In addition, DeSano personally went on numerous trips at a broker’s expense, sometimes while accompanying traders There is no such SEC rule. 17 16 problem is that I have to trade w/ [the brokerage firm] after I go!” Also in March 2003, Beran told another trader, “I figure I owe [the broker] 3 orders to pay for my annual . . . golf shirt.” i. Also in March 2003, Burns had this email exchange with a broker: Broker : . . . You must have a hankering to do a big CSCO [Cisco Systems] trade w/ me. At the very least, your prompt response will be rewarded w/ Celtic playoff seats. Thanks for caring. Burns: No hankering here, and you can send the tickets over. Broker : Our friendship has taken a significant step forward this AM. I could not be more pleased. Burns: Thank you!!!! Broker : Our friendship is boundless. Now, if you would please think of me next time a big situation appears on your desk, our friendship would be to the moon. j. In April 2003, a broker told Burnieika, “Keep up the flow and I will get you and [another Fidelity trader] a car to the airport Fri.” Two days later, the broker took Burnieika on a golf weekend in North Carolina. k. In April 2003, a broker told Pascucci, “Nice sales in FBF [FleetBoston Financial], thanks for the bus today, talk to you in AM. If you need any seats for Celts thurs night, I’ve got 2 courtside if you want them.” l. In August 2003, Smith used an analogy to the team-building techniques of certain baseball teams to explain to Pascucci his theory of how brokers use their travel and entertainment budget to attract Fidelity’s business: If you map out a strategy for “attacking FIDO [Fidelity]” to maximize commission $$, it seems there are 2 strategies. . . attack the generals, i.e. ingratiate yourself w/ the powerbrokers thru extensive use of the expense account (let’s call them the Yankees) who curry favor w/ THB [Bruderman], DKD [Donovan], and SCD [DeSano] . . . or recruit youth early (let’s call them the A’s) by showering the youngsters w/ service and small $$ perks. m. In April 2004, the broker told Burns that he was sending Red Sox tickets and added “ANDW [Andrew Corp.] 6 figs for sale.” Burns thanked him. The broker replied, 20 “Thx for sending over the Sox tix or thx for sending over the ANDW INDI or thx for being such a great guy or all of the above?” Burns responded, “All of the above.” 65. Indeed, some of the emails between traders and brokers reflect a shared perception that the job of a so-called “sell side” broker includes the provision of travel and tickets, and that one advantage of being a so-called “buy side” trader is the opportunity to receive such benefits. For example: a. In May 2002, Burnieika told a broker that he was going to two upcoming Celtics playoff games. The broker commented, “Nice to be king!” Burnieika replied, “Right side of the street when U2 concerts and Celts playoff games come around.” b. In August 2002, Smith observed to Pascucci “. . . Golf, dinners, tickets, Super Bowl, trips. Everything is for sale.” Two days later, Smith complained to Pascucci, “It’s bad enough w/ SCD [DeSano], DKD [Donovan], and Brudy [Bruderman], but when Horan and JDH [Harris] start in on the exclusive golf dates, it’s pathetic.” Pascucci replied, “Agreed 500%.” c. In September 2002, Bruderman sent a broker an email concerning plans for his wedding. Bruderman told the broker, “As of this morning you and [a broker at another firm] and Quinn are paying for it.” The broker replied, “Can’t wait. Send me the bill.” Later that day, Bruderman told Quinn, “Bad news. You and [another broker] have to pay for the wedding.” Quinn replied, “Creative T&E. Again.” d. In May 2003, Pascucci asked a broker, “Who will be first guy on sell side to offer Green Monster seats?” The broker replied, “Me.” (The “Green Monster” was a new area of expensive seats for Red Sox games at Fenway Park.) e. In September 2003, Bruderman received and forwarded to several brokers an email that parodied a beer company’s advertising campaign: Here’s to you Mr. Institutional Sales Trader. Because you spend all day lying to people with MBA’s from Ivy League schools, even though you failed Econ 101 at the Community College. And if the stock goes up or down, you don't care – as long as you get your nickel. Five cents a share! So crack open an ice cold Bud Light you overpaid sack of sh*t, because without you there would be a lot of buy side guys sitting in bad seats at the concert. f. In October 2003, Bruderman complained to one broker that a broker at another firm had been unable to get him tickets to a Bare Naked Ladies concert: “Say he has 21 no tickets left. Gave em all to [name omitted] and his hedge fund pals. I think I am going to request a change in coverage.” g. In May 2004, a broker asked Burns, “Are you aware of a guy who delivers Yankee tix to your desk faster than me? Seller of good size CSCO.” h. Also in May 2004, Pascucci offered Driscoll this praise for a broker: “[Name of broker] has not had a misstep for 1 second in his [name of firm] career. Trading is first rate. Research effort is consistent and impactful, and he is 500 times the ticket broker [name omitted] from Friend St. is. The new sales trading model.” 66. As reflected by the traders’ conduct and their email communications with brokers and each other, the conflicts of interest were not merely theoretical, and the traders did in fact allow their receipt of travel, entertainment and gifts to influence their selection of brokers to handle securities transactions for Fidelity’s clients. For example: a. In January 2002, Driscoll told another trader that he was going to the Super Bowl in New Orleans with a certain broker and added, “The good news is, the TYC [Tyco] order paid for [the broker’s] jet.” That day, Driscoll sent orders to the broker’s firm (including more than 8 million shares of Tyco stock) that generated more than $487,000 in commissions. Driscoll’s Tyco trade did not go unnoticed on the Equity Trading Desk. Smith observed to Pascucci: “[P]oor broker selection. Superbowl trip should not affect judgment” and “7 million shares of TYC [actually, 8 million shares] buys you a seat on a private jet.” b. Also in January 2002, Bruderman told a broker, “This BSX [Boston Scientific] order works to 1 mill. That should get us part of the way to paying for the band. How much is it so I know what I need to do to pay for it?” The broker responded that the band (Counting Crows) would cost “3 bills + love.” c. In March 2002, Smith commented to Pascucci that Bruderman sent most of his business to Quinn and brokers at two other firms who took him on trips and asked “Who says Fido can’t be bot?” Pascucci responded, “No comment on record. Off record, THB [Bruderman] has killed the integrity of this desk.” Smith replied, “How that does not raise red flags, I do not know.” d. In April 2002, Pascucci complained to Smith, “Here’s the truth. Image on street at all time low. We are VWAP18 robots and gift whores.” VWAP is “volume weighted average price.” VWAP is one of the methods that Fidelity used to measure the execution quality of the Equity Trading Desk. 22 18 u. In June 2003, Quinn told Bruderman, “You’re welcome for the Sox tix by the way.” Bruderman replied, “You’re welcome for the house in Needham [the location of Quinn’s residence].” v. In June 2003, Smith asked a broker for tickets to a Van Morrison concert. The broker offered him two front-row seats. Smith responded. “Right on.” Two minutes later, Smith wrote “Work 250m MSFT [Microsoft] for me.” w. Shortly after Quinn joined Jefferies, Quinn asked if Smith was upset with him. Smith replied, “Never have been. Just shocked how the red carpet has been rolled out to you. Your ‘new’ firm offers me nothing that I don’t already get from every other firm in the Top 30, so I apologize if I don’t drink the Kool-Aid.” Indeed, from September 2002 until mid- October 2003, Smith traded with Jefferies very infrequently. In mid-October 2003, however, that changed. On or about October 20, 2003, Smith began exchanging emails with Quinn about a trip to the Caribbean that Smith was planning with his wife. During the course of that exchange, Quinn offered to provide Smith with a private jet for his vacation. On the day Quinn offered to supply the jet, Smith sent more than 1.5 million shares to Jefferies. The next day, Smith sent nearly 1.4 million shares. All told, Smith traded with Quinn on sixteen of the seventeen trading days between the day Quinn offered his private jet and the day Smith left for his vacation. Smith’s heavy use of Jefferies continued after his return. Smith traded with Quinn on fourteen of the first sixteen trading days after the trip, including one day with nearly 1.2 million shares. The three days with orders totaling over 1 million shares were three of Smith’s four heaviest trading days with Jefferies during the Relevant Period, and the trades on those days generated nearly $190,000 in commissions. x. In December 2003, Pascucci asked a broker for courtside tickets to that night’s Celtics game. The broker offered four tickets. Pascucci told him where to deliver the tickets and added, “Thks. Buy 50K.” y. In February 2004, brokers took several traders to see the New England Patriots play in the Super Bowl in Houston. On the day before he left, Burnieika sent more than 500,000 shares to the broker who took him – his second largest day with the firm in the entire 2002-2004 period – and the trades generated more than $25,000 in commissions. z. In July 2004, Quinn provided tickets and a hotel for Burns to attend the Wimbledon tennis tournament in London at a cost of over $50,000. During the week after he returned (four trading days), Burns sent more than 7.6 million shares to Jefferies (more than 1.9 million shares per day). On one of the days, he sent 4 million shares – his second heaviest trading day with the firm in the entire 2002-2004 period. The trades on these four days generated $255,000 in commissions. aa. After the broker who facilitated Driscoll’s gambling changed firms in April 2004, Driscoll received the following request from the broker: “If you can find it in your 25 heart not to let me get shut out by the end of the day that would be greatly appreciated. Not a very good first impression. Have to go down to NY for the day tomorrow to meet all the traders.” Driscoll forwarded the broker’s message to Horan and commented, “How is it that we owe all these fuking millionaires something after we got them where they are?” Despite his griping, Driscoll began sending regular trades to the broker’s new firm two days later. 67. The decision of Harris to start sending business to Jefferies after Quinn joined the firm reflects how the receipt of travel, entertainment and gifts influenced his selection of brokerage firms. a. In May 2002, Harris learned that Quinn was moving to Jefferies after rejecting an offer from a major brokerage firm that handled a substantial amount of Fidelity business. Harris was unhappy about Quinn’s choice and complained to Bruderman, “Between me and you, I am frustrated he put me in this situation. It compromises your position on the desk to do a lot of bus with a firm like Jeff [Jefferies]. [The other firm] is easy because you can justify it. The desk will be pissed, especially now that commission dollars are under a microscope . . .”19 b. Despite his misgivings, Harris began sending a substantial amount of business to Jefferies in September 2002 after Quinn started working there. In late November 2002, however, Harris complained to Quinn about his trade execution: Harris: Just went out back . . . You were my 3rd broker for the month and 30th on [Fidelity’s trader performance measurement] and I was still number 3 on the desk . . . Guys wanted to know what Jeff[eries] was and why I was doing all the volume, hurting my [performance statistics] when I could have taken number 1. Reminds me of my [name of firm] numbers. [Harris named the firm where Quinn had worked before joining Jefferies.] Quinn: Pick up [the dedicated phone line between Fidelity and Jefferies]. Harris: One of 2 things will change: 1. your volume will drop. 2. my numbers will go up. Quinn: You’re right. It is all my fault. Harris was not the only trader to worry about Quinn’s move to Jefferies. Beran observed to Pascucci, “Don’t ask THB [Bruderman] about Jeffco . . . I think he is trying to figure out how he is going to justify laying all those orders into Quinn!” 26 19 c. Nevertheless, Harris continued trading – and traveling – with Quinn. In December 2002, Quinn and another Jefferies broker took Harris for a golf weekend in South Carolina. The week he returned (three trading days), Harris sent more than 2.6 million shares to the brokers (almost 870,000 shares per day). The trades generated more than $118,000 in commissions. d. In two July 2003 emails, Harris again complained to Quinn about his performance. In the first, Harris “thank[ed]” Quinn “for all the crummy [trader performance statistics] for last year and this year.” In the second, Harris warned Quinn that the “[t]ech guys in back are on to you. Brudy’s [Bruderman] numbers suk with you too.” e. Despite his complaints, Harris’s trading with Jefferies remained heavy throughout Quinn’s employment at the firm. Harris sent nearly 142 million shares to Jefferies after Quinn arrived, and the trades generated more than $6.5 million in commissions. 68. During the Relevant Period, the ten traders each directed equity trading business generating millions of dollars in commissions to brokers from whom they received travel, entertainment and gifts. The influence of travel, entertainment and gifts on Fidelity’s order flow is particularly apparent with respect to Jefferies: a. In the second quarter of 2002 (before Quinn’s arrival), Jefferies handled 12.9 million shares of securities for Fidelity. With this volume, Jefferies ranked 44th among the brokerage firms used by Fidelity. Jefferies’ volume rose quickly after Quinn’s arrival. In the fourth quarter of 2002 (Quinn’s first full quarter of employment), Jefferies’ ranking had risen to 12th. In the third quarter of 2004 (Quinn’s final full quarter of employment), Jefferies handled 112.9 million shares of securities, and its volume ranking was 13th. b. The brokerage commissions that Jefferies received from Fidelity increased in a similar fashion. In the first six months of 2002, just prior to Quinn’s arrival, Jefferies received nearly $888,000 in commissions, ranking it 42nd among the firms used by Fidelity. By contrast, in the first nine months of 2004, Jefferies received $20.7 million in brokerage commissions from the Fidelity Funds, improving its ranking to 10th among the firms used by Fidelity. During the period of Quinn’s employment, Jefferies received over $60 million in commissions from Fidelity’s client accounts. c. Most of the brokerage business that Jefferies received from Fidelity came from four traders (Bruderman, Donovan, Harris and Horan), who went on most of Quinn=s golf and other excursions, and from a fifth trader (Burns), who received expensive wine and expensive tickets to sporting events such as Wimbledon and the U.S. Open. During the period of Quinn=s employment at Jefferies (September 2002 to October 2004), these five traders alone sent trades generating approximately $39.4 million in commissions for Jefferies. 27 material fact or omitting to state any material fact required to be stated in any report filed with the Commission under Section 204. 75. Form ADV requires the disclosure of certain material information about the investment adviser. For an investment adviser like Fidelity with discretion to select brokers to execute its clients’ securities transactions, Item 12.B of Part II of Form ADV requires a description of the factors that the adviser considers when selecting brokers. 76. Section 34(b) of the Investment Company Act prohibits any person from willfully making an untrue statement of material fact in any document filed with the Commission. 77. Fidelity provides copies of its Form ADV to the independent trustees acting on behalf of the Fidelity Funds and to other clients. As investment adviser to the Fidelity Funds, Fidelity prepares Statements of Additional Information (“SAIs”) that supplement the Fidelity Funds’ prospectuses and are made available to shareholders upon request. 78. During the Relevant Period, the Forms ADV and the SAIs prepared by Fidelity contained virtually identical language to the effect that Fidelity selected brokers for its clients’ transactions “on the basis of professional capability and the value and quality of services.” The Forms ADV and the SAIs also listed specific factors that Fidelity considered when selecting brokers, including: (a) price, size and type of transaction; (b) reasonableness of commissions; (c) speed and certainty of trade executions; (d) nature and character of the markets for the security; (e) liquidity and depth offered by a market center or market-maker; (f) reliability of the market center or broker; (g) the degree of anonymity that the broker or market center can provide; (h) the broker’s execution services rendered on a continuing basis; and (i) the execution efficiency, settlement capability, and financial condition of the brokerage firm. The Forms ADV and the SAIs were materially misleading because they failed to disclose that, as set forth above, the traders’ receipt of travel, entertainment and gifts (including illegal drugs for Bruderman and the facilitation of illegal gambling for Driscoll) and their family and romantic relationships were also factors in the traders’ selection of brokers for Fidelity’s clients’ transactions, including transactions for the Fidelity Funds, and that Fidelity did not have a sufficient system of controls to detect, deter, and prevent such factors from entering into the selection of brokers. As a result, Fidelity willfully violated Sections 204 and 207 of the Advisers Act, and Rule 204-1 thereunder; and Section 34(b) of the Investment Company Act. Material Misrepresentations and Omissions by DeSano to the Fidelity Funds’ Trustees 79. During the Relevant Period, DeSano made periodic presentations to the trustees of the Fidelity Funds concerning equity trading operations and the selection of brokers for the Fidelity Funds’ transactions. For example: 30 a. On September 19, 2002, DeSano attended a meeting of the Brokerage Committee of the Fidelity Funds’ trustees and presented Fidelity’s annual report on equity trading and the use of brokerage commissions. DeSano’s written report to the trustees stated that the “sole criterion” for broker selection was “execution capability” and that “brokers compete on [the] basis of execution quality.” b. On September 18, 2003, DeSano attended a meeting of the Shareholder Services, Brokerage and Distribution Committee of the Fidelity Funds’ trustees and presented Fidelity’s annual report on equity trading and the use of brokerage commissions. According to the minutes of the meeting: Mr. DeSano provided an overview of the equity trading process, stating that FMR’s approach to trading is to focus solely on execution quality, trade with the best brokers and closely manage the impact of the funds’ trades on the market. He stated that as a result of the “broker segmentation” program implemented over five years ago, FMR now trades with a relatively small number of core brokers, which reduces information leakage and allows the brokers to compete based on the quality of their execution. [Emphasis added] c. On September 16, 2004, DeSano attended a meeting of the Shareholder Services, Brokerage and Distribution Committee of the Fidelity Funds’ trustees and presented Fidelity’s annual report on equity trading and the use of brokerage commissions. According to the minutes of the meeting: Mr. DeSano provided an overview of the equity trading process, stating that FMR’s highest priority in trading for the funds is execution quality. He stated that FMR seeks to trade with the best brokers and closely manage the impact of the funds’ trades on the market. He stated that as a result of broker segmentation program in place for the last six years, FMR trades with a relatively small number of core brokers, which reduces information leakage and allows the brokers to compete based on the quality of their execution. [Emphasis added] 80. Section 206(2) of the Advisers Act provides that an investment adviser shall not “engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client.” The statements by Fidelity, through DeSano, to the trustees of the Fidelity Funds were materially misleading because DeSano failed to disclose that, as set forth above, the traders’ receipt of travel, entertainment and gifts and their family and romantic relationships were also factors in the selection of brokers for the Fidelity Funds’ transactions, and brokers competed for Fidelity’s business on the basis of travel, entertainment and gifts in 31 addition to execution performance. As a result, Fidelity, through DeSano, willfully violated Section 206(2) of the Advisers Act. Fidelity Failed to Supervise Certain Employees and Officers 81. Under Section 17(e)(1) of the Investment Company Act, affiliated persons of a registered investment company are prohibited from accepting “from any source any compensation (other than a regular salary or wages from such registered company) for the purchase or sale of any property” of the investment company. During the Relevant Period, two Fidelity executives (DeSano and Grenier) and ten Fidelity traders (Beran, Bruderman, Burnieika, Burns, Donovan, Driscoll, Harris, Horan, Pascucci and Smith) each received compensation in violation of Section 17(e)(1) of the Investment Company Act in the form of travel, entertainment and gifts paid for by brokers who sought and obtained securities transactions for Fidelity’s clients. In addition, another Fidelity executive (Lynch) caused two Fidelity traders’ violations of Section 17(e)(1). Fidelity failed to adopt and implement a system of controls sufficient to detect, deter, and prevent the receipt by these executives and traders of travel, entertainment and gifts paid for by brokers as described herein. As a result, Fidelity failed reasonably to supervise the executives and traders, within the meaning of Section 203(e)(6) of the Advisers Act, with a view to preventing their violations of Section 17(e)(1) of the Investment Company Act. Fidelity’s Failure to Make and Keep True, Accurate and Current Copies of Certain Communications Concerning the Purchase or Sale of Securities for its Clients 82. Section 204 of the Advisers Act and Rule 204-2 thereunder require an investment adviser to make and keep true, accurate and current certain books and records relating to its investment advisory business, including originals or copies of certain documents reflecting its communications with brokerage firms relating to the placing or execution of orders to purchase or sell securities. 83. During the Relevant Period, Fidelity did not maintain a complete record of all its employees’ communications with brokers regarding the placing or execution of orders to purchase or sell securities. Fidelity contracted with Bloomberg to retain copies of all communications sent through Bloomberg’s email network between Fidelity’s equity traders and the brokers who handled securities transactions for Fidelity. Those email records were incomplete and inaccurate because when retrieved they did not include the names of individual email users who had terminated their employment with either Fidelity or a brokerage firm, such that in certain messages those users’ names would not be displayed. 84. Because, as set forth above, the emails maintained by Bloomberg on Fidelity’s behalf were incomplete, Fidelity failed to make and keep true, accurate, and current originals or copies of its communications with brokers concerning the placing or execution of orders to 32 employees that required management approval of all private jet travel, clarified the rules on permissible business entertainment, and required employees to report to the ethics office all business entertainment exceeding $250 in value. Later, with input from the independent trustees and an ethics consultant retained by the independent trustees, Fidelity’s parent company, FMR LLC revised its firm-wide business entertainment and workplace gifts policy. Subsequently, Fidelity also adopted a new relationship policy, requiring traders to notify their managers and the ethics office promptly if certain family members become employed in certain specified positions by any broker-dealer with which Fidelity does business. c. Fidelity also reorganized the management of its equity trading operations. Among other changes, in February 2005, Fidelity established a new level of management oversight between the head of equity trading and the traders. Subsequently, Fidelity appointed a new manager for its equity trading operations. d. Fidelity’s parent company, FMR LLC, substantially increased its ethics office’s funding for technology and personnel and hired a new management team to run the ethics office, including an employee whose sole responsibility is to manage compliance with FMR LLC’s gifts and entertainment policies for Fidelity and other FMR LLC subsidiaries. E. VIOLATIONS 93. As described above, Fidelity failed reasonably to supervise three Fidelity executives (DeSano, Grenier and Lynch) and ten Fidelity equity traders (Beran, Bruderman, Burnieika, Burns, Donovan, Driscoll, Harris, Horan, Pascucci and Smith), within the meaning of Section 203(e)(6) of the Advisers Act, with a view to preventing their committing and/or causing violations of Section 17(e)(1) of the Investment Company Act. 94. As described above, Fidelity failed to seek best execution for its clients’ securities transactions by allowing its traders’ receipt of travel, entertainment and gifts and the traders’ family or romantic relationships to enter into their selection of brokers. Accordingly, Fidelity willfully violated Section 206(2) of the Advisers Act. 95. As described above, Fidelity willfully violated Section 206(2) of the Advisers Act, in that Fidelity failed to disclose to its clients, including the Fidelity Funds, the material conflict of interest arising from the receipt by certain Fidelity executives and traders of travel, entertainment and gifts (including illegal drugs for Bruderman and the facilitation of illegal gambling for Driscoll) from, and certain traders’ family or romantic relationships with, brokers seeking and obtaining securities transactions for Fidelity’s clients. 96. As described above, Fidelity willfully violated Sections 204, 206(2) and 207 of the Advisers Act and Rule 204-1 thereunder and Section 34(b) of the Investment Company Act, in that Fidelity made materially false and misleading statements and omissions in its Forms ADV and in Statements of Additional Information for the Fidelity Funds about its selection of brokers. 35 97. As described above, Fidelity willfully violated Section 206(2) of the Advisers Act, in that Fidelity, through DeSano, made materially false and misleading statements and omissions to the trustees of the Fidelity Funds concerning the factors considered in its selection of brokers and the bases upon which brokers competed for the Fidelity Funds’ brokerage business. 98. As described above, Fidelity willfully violated Section 204 of the Advisers Act and Rules 204-2(a)(7)(iii) and 204-2(g) thereunder, in that Fidelity failed to make and keep true, accurate, and current originals or copies of certain communications with brokers concerning the placing or execution of orders to purchase or sell securities. IV. UNDERTAKINGS Respondents have undertaken to: A. Independent Compliance Consultant. 1. Within 30 days of the entry of the Order, Fidelity shall retain an Independent Compliance Consultant (“ICC”) not unacceptable to the staff of the Commission and the independent trustees. The ICC's compensation and expenses shall be paid exclusively by Fidelity. Fidelity shall cause the ICC to conduct a comprehensive review of Fidelity’s current policies and procedures designed to prevent and detect violations of Section 17(e)(1) of the Investment Company Act and Fidelity's securities trading with respect to the following: (i) remediation actions relating to its equity trading operations; (ii) gifts and gratuities policies and procedures; and (iii) other current policies and procedures designed to prevent undisclosed conflicts of interest. Fidelity shall cooperate fully with the ICC and comply with all of the ICC's reasonable requests for access to Fidelity's files, books, records, and personnel. 2. Fidelity shall require that, at the conclusion of the review, which in no event shall be more than 120 days after the date of entry of this Order, the ICC shall submit a Report to Fidelity, the independent trustees, and to the staff of the Commission. Fidelity shall require the ICC to address in the Report the issues described in paragraph (1) of these undertakings, and to include a description of the review performed, the conclusions reached, the ICC=s recommendations for changes in or improvements to Fidelity’s policies and procedures for implementing the recommended changes in or improvements to Fidelity’s policies and procedures. 3. Fidelity shall adopt all recommendations contained in the Report of the ICC; provided, however, that within 150 days from the date of the entry of this Order, Fidelity shall in writing advise the ICC, the independent trustees, and the staff of the Commission of any recommendations that it considers to be unnecessary or inappropriate. With respect to any 36 recommendation that Fidelity considers unnecessary or inappropriate, Fidelity need not adopt that recommendation at that time but shall propose in writing an alternative policy, procedure, or system designed to achieve the same objective or purpose. 4. As to any recommendation with respect to Fidelity=s policies and procedures on which Fidelity and the ICC do not agree, such parties shall attempt in good faith to reach an agreement within 180 days of the date of the entry of this Order. In the event Fidelity and the ICC are unable to agree on an alternative proposal acceptable to the staff of the Commission, Fidelity will abide by the determinations of the ICC. 5. Fidelity (i) shall not have the authority to terminate the ICC, without prior written approval of the staff of the Commission; (ii) shall compensate the ICC, and persons engaged to assist the ICC, for services rendered pursuant to this Order at their reasonable and customary rates; and (iii) shall not be in and shall not have an attorney-client relationship with the ICC and shall not seek to invoke the attorney-client or any other doctrine or privilege to prevent the ICC from transmitting any information, reports, or documents to the staff of the Commission. 6. Fidelity shall require the ICC to enter into an agreement that provides that for the period of engagement and for a period of two years from completion of the engagement, the ICC shall not enter into any employment, consultant, attorney-client, auditing or other professional relationship with Fidelity, or with any of Fidelity’s present or former affiliates, directors, officers, employees, or agents acting in such capacity. The agreement will also provide that the ICC will require that any firm with which he/she is affiliated or of which he/she is a member, and any person engaged to assist the ICC in performance of his/her duties under this Order shall not, without prior written consent of the Commission staff, enter into any employment, consultant, attorney-client, auditing or other professional relationship with Fidelity, or with any of Fidelity’s present or former affiliates, directors, officers, employees, or agents acting in such capacity for the period of the engagement and for a period of two years after the engagement. B. Certification. No later than twelve months after the date of entry of this Order, the chief compliance officer of Fidelity shall certify to the Commission in writing that Fidelity has fully adopted and complied in all material respects with the undertakings set forth in this section IV and with the recommendations of the ICC or, in the event of material non-adoption or non­ compliance, shall describe such material non-adoption and non-compliance. C. Recordkeeping. Fidelity shall preserve for a period not less than six years from the end of the fiscal year last used, the first two years in an easily accessible place, any record of Fidelity’s compliance with the undertakings set forth in this section IV. D. Deadlines. For good cause shown, the Commission staff may extend any of the procedural dates set forth above. E Other Obligations and Requirements. Nothing in this Order shall relieve 37