F-Prime Capital Partners, a private venture capital fund run on behalf of the Johnson family — who founded Fidelity Investments and own it through privately held FMR LLC — competes directly with Fidelity mutual funds,
Reuters reported.
Securities lawyers told Reuters the arrangement poses a conflict of interest.
The lengthy Reuters report said Securities and Exchange Commission conflict-of-interest rules prevent affiliated entities from buying large stakes in the same companies at the same time. Thus, because F-Prime Capital had made pre-IPO investments in certain companies, Fidelity mutual funds were prohibited from investing before the IPO.
Reuters analyzed 10 investments since early 2013. “The analysis found that, in six of those cases, Fidelity's mass-market mutual funds made major investments later and at much higher prices than the insiders' fund, resulting in lower returns for Fidelity fund shareholders,” the Reuters article said.
In addition, Reuters reported, “Over the past three years, U.S. regulatory findings show, the Johnson-led venture arm has beaten Fidelity mutual funds to some of the hottest prospects in tech and bioscience — including the best performing IPO of 2015.”
Yale University law professor John Morley told Reuters that what F-Prime Capital is doing isn't illegal or unethical. “But it's entirely appropriate for mutual fund investors to take their money elsewhere because Fidelity has made a decision to take away some of their potential returns,” Morley said.
Reuters also reported that “Key compliance executives have held dual roles overseeing investments by Fidelity and F-Prime Capital.” In addition, “Some portfolio managers for Fidelity's mass-market funds receive lucrative partnership interests in the private F-Prime funds.” (Source: Reuters, Oct. 5, 2016.)
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