HSBC just found out that it’s a bad idea to provide investment advice to Americans and not be registered with the SEC. The British bank has been fined $12.5 million by the U.S. agency for permitting its Swiss private banking unit to manage U.S. accounts for over a decade without the appropriate U.S. registrations.
While the fine is a mere slap on the wrist to a bank that paid out over $1.9 billion to U.S. authorities two years ago for laundering Mexican and Columbian drug money, the fact that a sophisticated financial institution like HSBC ignored U.S. advisory regulations at all suggests that it may not be the only unregistered foreigner advising U.S. persons on matters falling within the SEC’s jurisdiction.
SEC rules obligate any non-U.S. investment adviser to register with the agency and subject itself to U.S. advisory regulations if it offers investment advice for a fee:
- from an office in the U.S.; or
- to more than 15 U.S. advisory clients (including fund investors); or
- to U.S. accounts totaling $25 million or more in value; or
- to a U.S. mutual fund.
A foreign adviser who meets any of these conditions must complete a detailed registration form (Form ADV) and submit it to the SEC for approval. Form ADV comes in two parts of which the first is a questionnaire about your firm and its business practices that is published online by the SEC and the second is a narrative brochure describing your firm that you must give to your U.S. clients. The SEC reviews both documents and doesn’t grant registration until it is satisfied that they are in good form.
In addition to fulfilling advisory registration requirements, a foreign registrant must also designate a qualified person in its organization (in the U.S. or abroad) to serve as its Chief Compliance Officer and develop a comprehensive compliance manual detailing its policies and procedures for satisfying U.S. regulatory requirements, including its methods for resolving conflicts of interest.
There is a partial exemption for foreign advisers whose only U.S. clients are investors in private funds with aggregate U.S. capital of less than $150 million. Those advisers need only file a portion of Form ADV with the SEC and are subject to a lighter regulatory regime than other foreign registrants. Nevertheless, even foreign advisers who are totally exempt from federal advisory regulations must still determine whether they have regulatory responsibilities under U.S. state laws where their U.S. clients reside.
U.S. regulatory requirements are extensive, and are getting more so every day. The key to staying on the right side of the road is not just identifying the investment-related activities that need to be monitored and controlled in your compliance manual, but making certain that those controls are properly and consistently enforced. The days of paying lip service to U.S. securities laws are over.
You should also be aware that U.S. advisory regulations may not be your only concern. If you are executing securities or commodities transactions for U.S. clients on a commission basis or raising capital from them for your funds, you are also subject to U.S. broker-dealer regulations. Those federal rules entail an entirely different SEC registration for your firm, licensing of your salesmen and supervisors and a host of other compliance obligations that are far more extensive than their advisory counterparts.
Not surprisingly, HSBC was reported to have run afoul of these B-D regulations as well. Now, adding to its fines, those missteps entitle HSBC’s brokerage clients to rescind any trades that may have turned sour.