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NEW YORK (Reuters) - The NASD said on Tuesday it fined two Fidelity broker-dealers a total of $400,000 for misleading U.S. military personnel in sales literature promoting two mutual funds.
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The violations took place between January 2003 and January 2006 and concerned the Destiny I and II funds, which require investors to invest in installments, the regulator said.
Fidelity Distributors Corp. of Boston and Fidelity Investments Institutional Services Co. of Smithfield, Rhode Island, will pay the fine, which will go toward the NASD military financial education program. Neither admitted wrongdoing.
According to the NASD, the broker-dealers issued literature with "mountain charts" that showed the funds outperformed the Standard & Poor's 500 index over a 30-year period, but which masked substantial underperformance in the most recent 15 years.
The literature also failed to show the funds lagged the S&P 500 over the most recent 10 years, and used the wrong share class to show long-term performance. In addition, the broker-dealers sent a newsletter to more than 325,000 Destiny Plan holders that overstated the plan's performance, the NASD said.
"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," said NASD enforcement chief James Shorris in a statement.
He added that the 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."
Fidelity Investments spokeswoman Anne Crowley said: "We regret these errors, and have taken steps to ensure they do not occur in the future. We do not believe, however, that any of the errors altered the underlying intended message of any of the sales literature."
Crowley and an NASD spokesman said they did not immediately know whether the literature went to military personnel in Iraq.
Systematic investment plans, also called periodic payment plans, typically require monthly investments for lengthy periods, often 10 or 15 years, even if performance starts to suffer. They typically carry large fees during the first year -- in Destiny's case, 50 percent on the first year of payments, the NASD said.
Congress last year banned the sale of new systematic investment plans when it passed the Military Personnel Financial Services Protection Act of 2006, though older plans remain in force.
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The violations took place between January 2003 and January 2006 and concerned the Destiny I and II funds, which require investors to invest in installments, the regulator said.
Fidelity Distributors Corp. of Boston and Fidelity Investments Institutional Services Co. of Smithfield, Rhode Island, will pay the fine, which will go toward the NASD military financial education program. Neither admitted wrongdoing.
According to the NASD, the broker-dealers issued literature with "mountain charts" that showed the funds outperformed the Standard & Poor's 500 index over a 30-year period, but which masked substantial underperformance in the most recent 15 years.
The literature also failed to show the funds lagged the S&P 500 over the most recent 10 years, and used the wrong share class to show long-term performance. In addition, the broker-dealers sent a newsletter to more than 325,000 Destiny Plan holders that overstated the plan's performance, the NASD said.
"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," said NASD enforcement chief James Shorris in a statement.
He added that the 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."
Fidelity Investments spokeswoman Anne Crowley said: "We regret these errors, and have taken steps to ensure they do not occur in the future. We do not believe, however, that any of the errors altered the underlying intended message of any of the sales literature."
Crowley and an NASD spokesman said they did not immediately know whether the literature went to military personnel in Iraq.
Systematic investment plans, also called periodic payment plans, typically require monthly investments for lengthy periods, often 10 or 15 years, even if performance starts to suffer. They typically carry large fees during the first year -- in Destiny's case, 50 percent on the first year of payments, the NASD said.
Congress last year banned the sale of new systematic investment plans when it passed the Military Personnel Financial Services Protection Act of 2006, though older plans remain in force.
