Fidelity Investments and two other investment companies were served subpoenas by Secretary of State William F. Galvin, who is investigating whether sales representatives gave out confidential information to Prudential Securities brokers.
Galvin's office is probing whether the salespeople at Fidelity, Franklin Templeton Investments and Morgan Stanley helped some Prudential brokers in Boston evade the fund firm’s internal policies aimed at preventing improper short-term trades of fund shares, published reports said.
Investigators reportedly want to know whether anyone at the three firms helped Prudential brokers evade policies prohibiting the process of marketing timing — or darting in and out of mutual funds to take advantage of pricing inefficiencies — for example by warning brokers away from accounts that would being watched closely.
Also subpoenaed were certain Franklin Templeton and Morgan Stanley workers. Those wholesalers, as they are known in the industry, generally market company mutual funds to securities brokers and investment advisers, and often are paid or receive bonuses based on how much money they bring in to their firm.
Brian McNiff, a Galvin spokesman, confirmed that Galvin issued the subpoenas Thursday, but declined further comment.
“All we know is that a Fidelity employee was sent a subpoena requesting the employee give information regarding the Prudential Securities matter,” said Fidelity spokeswoman Anne Crowley. “We expect every employee to act consistently with the firm’s policies, and if we find at time any of our policies have not been followed, then appropriate action is taken.”
Fidelity is the No. 2 mutual fund company, behind Vanguard Group, in terms of assets under management.
Franklin Templeton, the nation’s fourth largest mutual fund manager, said in a statement that it had received a subpoena “addressed to a former Franklin Templeton employee related to the Prudential Securities matter.” The employee left the firm in February, and Franklin Templeton declined further comment.
Morgan Stanley spokeswoman Andrea Slattery said only that the salesperson subpoenaed “has no involvement with” the company’s “U.S.-registered mutual funds.” She declined further comment, except to add the company is cooperating with various regulatory probes of market timing.
Galvin’s office already has taken sworn testimony from current and former Prudential employees and officials, and it has subpoenaed company documents as part of its investigation into market timing at the firm’s Boston office.
A Prudential branch manager and five brokers were forced to resign from the Boston office two weeks ago by Wachovia Corp., which recently purchased Prudential’s securities business.
Fidelity, Franklin Templeton and other fund companies previously had receive subpoenas from New York Attorney General Eliot Spitzer, who also is probing trading practices and policies.
Galvin’s investigation is looking into a form of short-term trading that takes advantage of delays in the way mutual funds are priced. Many fund firms, including Fidelity, discourage such trades, partly because they can take money away from long-term investors.