A class action lawsuit has been filed against the two investment companies for allegedly breaching their best execution obligations to investors. The federal class action was filed in US District Court for the Southern District of Illinois and claims Fidelity Management and Research and FMR steered transactions toward brokers who lavished them with unlawful rewards such as event tickets and vacations. The class includes all those who were clients between May 1, 2002, and October 31, 2004.
Fidelity Management and FMR are registered investment advisors who create, manage, and advise investment portfolios. Both companies decide which securities' brokers to purchase or sell securities through. The brokers then get a commission based on such transactions. Although each share may only differ by a few cents, it can quickly build to significant amounts considering advisers often trade in blocks of tens or hundreds of thousands of shares per transaction and may enter into a significant number of transactions per year.
According to the lawsuit, the best execution obligation forms a binding contract that required Fidelity and FMR to choose execution brokers on the basis of the most favorable practicable execution costs, taking into consideration the size of each transaction, the number of transactions per year, the market impact of the transaction, brokerage commissions, services provided by the broker and other considerations.
