HSBC Securities to pay $2M fine for FINRA rule violations
HSBC Securities (USA) Inc. has agreed to pay a fine of $2 million as a part of a settlement with the Financial Industry Regulatory Authority (FINRA).
Between January 2013 and December 2021, each research report HSBC published contained inaccurate disclosures about the firm’s conflicts of interest. Specifically, HSBC published 67,482 equity research reports with approximately 275,000 disclosure inaccuracies in violation of FINRA Rules 2241(c) and 2010 and NASD Rule 2711(h).
Similarly, between July 2016 and December 2021, each debt research report HSBC published contained inaccurate disclosures about the firm’s conflicts of interests. Specifically, HSBC published 2,470 debt research reports with approximately 39,000 inaccurate disclosures in violation of FINRA Rules 2242(c) and 2010.
In approximately 38,900 instances in 20,000 equity reports, and approximately 5,600 instances in 1,400 debt reports, HSBC did not accurately disclose whether the firm or its affiliates received compensation for investment banking services from a subject company in the past year.
In approximately 58,900 instances in 30,300 equity reports, and approximately 9,600 instances in 1,600 debt reports, HSBC did not accurately disclose whether a subject company was a firm client in the twelve-month period preceding the report, and the types of services provided by HSBC.
HSBC’s disclosure inaccuracies comprised of both failures to disclose conflicts as well as disclosure of conflicts that did not exist, with most being over-disclosure. The firm’s disclosure inaccuracies stemmed from several issues with the data feeds it used to generate conflicts disclosures in research reports.
HSBC also applied a definition of investment banking services that incorrectly excluded such services in connection with asset-backed securities, private placement bonds, and certain structured products. As a result, the firm did not include data from those products in its data feeds, causing a failure to disclose investment banking related conflicts involving those offerings and products.
In addition, the firm based its disclosures of investment banking revenue on two years of data even though the applicable rules limit the scope of the data to one year, resulting in over disclosure. Further, the firm at times did not timely add new client relationships to the data feeds or used inconsistent naming conventions for the same client, resulting in a lack of required disclosures or inaccurate disclosures.
From January 2013 to December 2021, HSBC did not establish and maintain a supervisory system, including written supervisory procedures, that was reasonably designed to achieve compliance with the disclosure requirements of FINRA Rules 2241(c) and 2242(c) and NASD Rule 2711(h). HSBC had no procedures, testing, or other system to confirm that the information in the data feeds was accurate and complete, nor did the firm assign responsibility for confirming the accuracy and completeness of its data feeds to any individuals or groups.
Consequently, HSBC was unable to detect the data feed deficiencies, causing the disclosure inaccuracies to occur over almost nine years.
On top of the $2,000,000 fine, HSBC has agreed to a censure.