The firm reportedly engaged in transactions that represented conflicts of interests and a failure to deal fairly with clients
The British Columbia Securities Commission (BCSC) has announced a settlement agreement with Genus Capital Management over its reported misuse of client brokerage commissions.
According to the regulator, the misused commissions consisted of so-called soft dollars, or credits that a broker offers to an investment manager in return for executing trades on behalf of the manager’s clients. They make up part of the brokerage commission paid by the investment manager’s clients, and may be used for eligible expenses that benefit clients as long as they are disclosed appropriately.
“Genus admitted that between 2009 and 2016 it used $1.67 million in soft dollars to pay for the development of in-house software,” said the BCSC. The firm subsequently transferred the software to a company in exchange for part-ownership of that company as well as a permanent license to use the software.
The regulator noted that a member of the Genus leadership team was related to someone involved with the two companies paid to develop the software, as well as the third company that bought the software from Genus.
The regulator noted that software development is not among the permitted uses for soft dollars; firms can only use them to buy existing software for placing orders and research. In transferring the software to another company in exchange for an ownership stake in the company, Genus failed to deal fairly with its clients. The fact that a relative of the firm’s leadership team was involved in the software development and subsequent transfer should also have been disclosed to clients as conflicts of interests.
“All of these were violations of securities laws,” the BCSC said.
As part of the settlement, Genus has agreed to repay $1.67 million to current and former clients. Current clients will receive compensation in the form of management-fee credits, while former clients will get cash refunds.
Aside from that, the firm is to pay $350,000 to the BCSC. Genus has reportedly paid the regulator $87,500 as a first instalment, and has agreed to pay the remainder within four years. Its clients and former clients must also be repaid over that time.
The BCSC has also required Genus to disclose the compliance failures to its current and former clients, and hire an independent compliance monitor for a minimum of one year to review their soft-dollar and conflicts-of-interest practices.
Genus has previously been found accountable for other compliance failures. Its history of running afoul of securities laws includes a settlement agreement with the BCSC in 2012 over its failure to file exempt distribution reports. Several violations uncovered in a previous review also prompted a 2016 decision by the BCSC to require Genus to hire an external compliance for a year.
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