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From Securities Regulation Daily, November 25, 2014

Unregistered cross-border operations costs HSBC $12.5M

By Matthew Garza, J.D.

Switzerland-based HSBC Private Bank admitted wrong doing and paid almost $10 million in disgorgement and interest, plus a $2.6 million penalty, for providing cross-border brokerage and investment advisory services in the U.S. without registering with the SEC. The SEC’s order instituting settled administrative proceedings said the bank was aware of the registration requirements as early as 2001, after it sought legal advice following a merger that increased its U.S. client base. Despite efforts by the bank to curb the servicing of U.S. client accounts, the accounts were not closed until it formed an “account closing team” in 2011 (In the Matter of HSBC Private BankRelease No. 73681, November 25, 2014).

The SEC alleged that between 2003 and 2011 HSBC employed “relationship managers” (RMs) who traveled to the U.S. and used mail and email to provide investment advice to 368 clients with $775 million in assets under management without registering as brokers or advisers under Exchange Act Section 15(a) or Advisers Act 203(a).

The bank was aware that the brokerage and investment advisory services being provided triggered registration requirements after being advised by an outside law firm to consolidate the accounts among a smaller number of RMs to qualify for the private adviser exemption in Advisers Act 203(b)(3). The RMs did not comply with the advice, however, “because they did not want to lose the accounts,” according to the SEC. The RMs collected approximately $5.72 million in commissions and fees on the accounts.

“HSBC’s Swiss private banking unit illegally conducted advisory or brokerage business with U.S. customers,” said SEC Enforcement Director Andrew Ceresney. “HSBC Private Bank’s efforts to prevent registration violations ultimately failed because their compliance initiatives were not effectively implemented or monitored.”

The release is No. 73681.

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