HSBC Securities (Canada) Inc. will pay more than $1 million to settle allegations that it allowed market timing practices in the trade of mutual funds.
The Investment Dealers Association of Canada announced the penalties today.
HSBC Securities acknowledged that from January 1, 2002 to July 1, 2002, it engaged in potentially harmful practices by executing market timing trades for one client. During this time period, the firm executed approximately 800 trades involving 14 mutual funds from six mutual fund companies.
The IDA says HSBC Securities should have been aware that this practice was potentially harmful to long-term unitholders. The firm received written warnings from mutual fund companies regarding the market timing activities.
Nevertheless, HSBC Securities permitted the client to continue market timing activity.
In January 2004, the IDA sent a market timing/late trading survey to all member firms requesting information about any market timing trading done by the firm on behalf of clients. HSBC Securities completed the survey and outlined the market timing trading activity done through it by the client.
In July 2004, HSBC Securities, on its own initiative, provided further disclosures relating to special arrangements between the client and certain fund companies. In February 2005, the IDA requested additional information from HSBC Securities about market timing activity.
In preparing its response to these new queries, HSBC Securities realized that it had under-reported in its original response to the January 2004 survey. HSBC Securities identified this under-reporting to the IDA in March 2005 on its own initiative. HSBC Securities’ under-reporting of its market timing activity was a result of poor communication between relevant personnel at the firm and was not intentional. However, the under-reporting was not discovered until further inquiries were made by the IDA.
“Timely and accurate self-reporting by firms is a critical component of effective self-regulation,” said Jeff Kehoe, director, enforcement litigation, IDA “There can be no tolerance of failure to report fully and accurately.”
HSBC Securities admitted that during the period from January 1, 2002 to July 1, 2002, HSBC it failed to implement supervisory systems to address red flags, and thereby detect and prevent potentially harmful market timing practices.
HSBC Securities is fined $506,596 for market timing activity; $100,000 for under-reporting; and must disgorge gross market timing revenues of $506,596.
In addition, HSBC Securities must pay $50,000 in IDA costs.
“This settlement is based on long-standing principles and rules that go to the heart of what is appropriate conduct in a client-broker relationship,” said Paul Bourque, senior vice president, member regulation, IDA. “Although existing rules and regulations were a guide to appropriate conduct, HSBC Securities permitted a sophisticated client to engage in trading that potentially enriched it at the expense of long-term unitholders, who were sold mutual funds as a ‘buy and hold’ investment.”
HSBC Securities has already set-up an internal committee to consider how to identify and address emerging issues in the securities industry. It will provide a report from the committee within six months of approval of the Settlement Agreement to the IDA’s Sales Compliance Department regarding its processes to address emerging issues in the securities industry.