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HSBC hit with $1.16-million fine

Brokerage allowed client to perform market timing trades despite warnings

HSBC Securities (Canada) Inc. was fined $1.16-million yesterday by the Investment Dealers Association (IDA) of Canada for allowing one sophisticated client to carry out market timing activities in connection with mutual fund trading.

By taking advantage of market pricing inefficiencies in valuing mutual funds, the client, an offshore entity, effectively took away profits from long-term investors in the various mutual funds involved.

As part of the settlement, Toronto-based HSBC conceded that it had allowed the client between Jan. 1 and July 1, 2002, to execute about 800 trades involving 14 mutual funds from six mutual fund companies.

The size of the trades ranged from $99,000 to $14.5-million.

Two of the funds -- HSBC Global Equity Fund and HSBC European Fund -- were affiliates of the investment dealer.

HSBC allowed the trading to continue despite written warnings from some mutual fund companies that the practice hurt unitholders, the IDA said.

Included in the fine was a $100,000 penalty because HSBC inadvertently failed to fully report on the activities of the client in a survey performed by the IDA in January, 2004.

The financial penalty of $1,163,192 also included a return of $506,596 in market timing revenue to the mutual fund clients, a fine of $506,596 and costs of $50,000.

HSBC is the fourth bank-owned investment dealer that has been fined by the IDA for executing market-timing trades.

In late 2004, RBC Dominion Securities Inc., BMO Nesbitt Burns Inc. and TD Waterhouse (Canada) Inc. paid penalties totalling almost $50-million for allowing sophisticated clients to execute these trades in 2002 and 2003, according to the IDA.

Also late last year five mutual fund groups -- AGF Management Ltd., AIC Ltd., CI Fund Management Inc., Franklin Templeton Investments Corp. and Investors Group Inc. -- agreed to distribute $205.6-million to unitholders. Cheques will be mailed Sept. 12 to Sept. 30.

One fund estimated that if an investor held $5,000 in a fund when market timing occurred, they will receive $25 in compensation.

© 2007 The Globe and Mail. All rights reserved.

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