In a case that exemplifies the importance of proper registration prior to initiating operations, HSBC’s Private Bank (“HSBC”) settled the Security and Exchange Commission’s (“SEC”) charges for failing to register before providing cross-border brokerage and investment advisory services to U.S. clients. HSBC admitted wrongdoing, accepted a censure and a cease-and-desist order, and was ordered to pay the SEC $12.5 million.
According to the SEC order, relationship managers with the HSBC traveled to the U.S. to solicit clients, and established or maintained brokerage and investment advisory accounts. They also provided investment advice and sought securities transactions without being registered to provide such services. The Private Bank’s relationship managers were also not affiliated with a registered investment adviser or broker-dealer, but still communicated directly with U.S. clients through overseas mail and emails. According to the SEC, HSBC began providing these advisory and brokerage services in the U.S. more than 10 years ago and during that time gained 368 U.S. client accounts and received approximately $5.7 million in fees.
While implemented compliance initiatives, their efforts to prevent registration violations ultimately failed because their compliance initiatives were not effectively implemented or monitored,” according to Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.
While some argue the impetus for the investigation by the SEC of the HSBC was to further Washington’s crackdown on the secrecy of Swiss banking practices; it also exemplifies the importance of proper registration. Investment advisory and broker dealer firms need to remember that registrations needs to occur prior to performing any such activities and that a firm’s registration status may change following a merger or acquisition, change in ownership or even a change in corporate entity structure. It is also vital that all individuals of such firms be properly registered should their roles warrant such registrations. Determining when registration is required and how certain events effect registration at both the firm and individual levels is sometimes difficult and a matter of facts and circumstances. It is recommended that you consult an attorney should you have any questions regarding such issues.
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