Fidelity to Tighten Redemption Fee Tracking, Collection Process

September 29, 2004 ( - In a letter to clients with funds in omnibus accounts, Fidelity Investments senior vice president Gary Gallagher announced that all redemption fees applicable to certain Fidelity funds in omnibus accounts must be assessed without exception as of January 1st, 2005.

Although Gallagher claimed that the mutual fund firm’s current system discouraging short-term trading has been effective, the new policy will require that all firms must track, collect and remit short-term redemption fees on a sub-account level.

The consequences for not complying with the Fidelity directive could be severe. If, by the time of implementation, a firm has not modified its internal system to accommodate the sub-account level tracking and collecting of short-term trading redemption fees, Fidelity will not accept purchase orders or periodic investments through its Fidelity Automatic Account Builder on funds imposing redemption fees.

“While we believe our current policies and controls have been effective in discouraging market timing, we are implementing this process to make sure we are doing everything we should to discourage excessive trading by shareholders, and ensure that short-term trading is not detrimental to our long-term fund shareholders,” Gallagher wrote in the letter.

Omnibus accounts are those with more than one beneficial owner whose identity is not disclosed, and who has the ability to effect transactions on an account. This often includes retirement funds, as well as banked pooled accounts. Fidelity does allow for omnibus accounts to be broken up into individual accounts

Fidelity has mostly stayed above the fray with regards to the mutual fund trading scandal. However, according to a July report on, Oppenheimer’s Michael Sassano, one of Wall Street’s most successful market-timing brokers, had a Fidelity account that allowed him to frequently trade shares of non-Fidelity funds for the benefit of his hedge fund customers through the Fidelity trading platform (See  Report: Fidelity had Market Timing Relationship ).

Federal and state regulators have been pursuing a wide-ranging fund investigation focusiing primarily on market timing, late trading, and certain sales practices. In the scandal’s wake, many firms have turned to short-term redemption fees as a way to combat certain abusive trading practices.