BC regulator finds the firm crossed a line when it cut ties with 51 independent dealers to comply with stiffer global standards
The British Columbia Securities Commission (BCSC) has announced a settlement agreement with HSBC Global Asset Management (Canada) Limited (GAM Canada) under which the firm has agreed to pay $1,050,000.
In the settlement agreement, the regulator said that in 2012, the firm and other entities within the HSBC Group started to implement a set of financial crime compliance global standards. As part of that compliance effort, GAM Canada was to ensure that any third-party dealers (TPDs) that distributed HSBC-branded mutual funds were aligned with those global standards as well.
During the relevant period, GAM Canada was the manager, trustee, primary investment advisor, and registrar for 25 HSBC-branded, prospectus-based mutual funds with combined assets of roughly $11 billion. Of those funds, 14 were suitable for investors with long-term horizons, according to their simplified prospectuses.
In 2014, GAM Canada decided to terminate its arrangements with certain TPDs that it determined were no longer aligned with its overall strategic focus. In line with those terminations, GAM Canada required clients of those TPDs to redeem their fund units.
“GAM Canada provided the Identified Dealers with at least 60 days’ notice of the termination of the Dealer Agreements and the Required Redemptions,” the BCSC said. “It relied on the Identified Dealers to inform the Impacted Unitholders about the Required Redemptions and to redeem the units before the termination of the Dealer Agreements.”
The redemptions occurred in two tranches – one in 2014, the other in 2016 – with the majority taking place in 2014. All in all, the required redemptions amounted to roughly $21.9 million across 1,042 accounts at 51 TPDs.
In instances where the unitholders did not redeem by the termination date, GAM Canada redeemed the units, depositing all the proceeds into the impacted unitholders’ respective accounts.
By depriving impacted unitholders of the choice to keep holding the security they purchased, the BCSC said GAM Canada was unfair to buyers who had relied on disclosures saying that they were suitable for long-term investment horizons.
For some impacted unitholders, the required redemptions may also have resulted in crystallized losses, unanticipated tax consequences from capital gains triggered in non-registered accounts, lost investment opportunities from not being invested for a time before they became aware of the redemptions, and potential re-acquisition costs to acquire suitable replacement securities.
Under the settlement agreement, GAM Canada will pay $350,000 to the BCSC immediately, and will set aside $700,000 as compensation for impacted unitholders. The firm has identified roughly $625,000 to be paid to some 750 accounts.
On or about December 31, the firm is to report to the BCSC how much compensation it has paid out; the balance of the $700,000 set aside to compensate impacted unitholders will be paid to the commission.
