HSBC’s Swiss-based private banking arm agreed today to pay $12.5 million to Securities and Exchange Commission for violating federal securities laws by failing to register with the SEC before providing cross-border brokerage and investment advisory services to U.S. clients.

According to the SEC, HSBC Private Bank and its predecessors began providing cross-border advisory and brokerage services in the United States more than 10 years ago, amassing as many as 368 U.S. client accounts and collecting fees totaling approximately $5.7 million. Personnel traveled to the United States on at least 40 occasions to solicit clients, provide investment advice, and induce securities transactions, even though they were not registered to provide such services, nor were they affiliated with a registered investment adviser or broker-dealer. 

These relationship managers also communicated directly with clients in the U.S. through overseas mail and e-mails. In 2010, HSBC Private Bank decided to exit the U.S. cross-border business, and nearly all of its U.S. client accounts were closed or transferred by the end of 2011.

HSBC Private Bank understood the risk of violating federal securities laws by providing unregistered broker-dealer and investment advisory services to U.S. clients, and the firm undertook certain compliance initiatives in an effort to manage and mitigate the risk. The firm created a dedicated North American desk to consolidate U.S. client accounts among a smaller number of relationship managers and service them in a compliant manner that would not violate U.S. registration requirements. 

Relationship managers, however, were reluctant to lose clients by transferring them to the North American desk. HSBC Private Bank’s internal reviews revealed multiple occasions when U.S. accounts that were expected to be closed under certain compliance initiatives remained open. “HSBC Private Bank’s efforts to prevent registration violations ultimately failed, because their compliance initiatives were not effectively implemented or monitored,” SEC Director of Enforcement Andrew Ceresney said.

As part of the settlement, HSBC Private Bank agreed to admit the facts in the SEC’s order, acknowledge that its conduct violated federal securities laws, and accept a censure and a cease-and-desist order.  The firm agreed to pay $5.7 million in disgorgement, $4.2 million in prejudgment interest, and a $2.6 million penalty.

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