Vancouver based investment management firm Genus Capital Management Inc. has been slapped with a groundbreaking $350,000 fine and ordered by the B.C. Securities Commission to repay $1.67 million of misused client fees known as “soft dollars.”
The company settled with the BCSC after it admitted to failing to declare a material conflict of interest and improperly using fees, in part, for their own gain when they’re not intended for such use.
“The BCSC has broken new ground here,” said Peter Brady, executive director of the BCSC. “We are not aware of any prior soft dollar cases in B.C. In fact, this is one of the only soft dollar enforcement cases in Canada. Conflicts of interest are a hot topic today, and this is an example of the BCSC taking action to ensure that registrants deal with conflicts appropriately.”
Brady called the fine “significant,” however he also noted in the settlement agreement that Genus was never found to have purposefully engaged in wrongdoing, although the company did have two prior compliance deficiencies in 2012 and 2015.
Soft dollars are a portion of fees paid by investors to brokers, which are then passed on to portfolio managers such as Genus for initially directing clients to the brokers.
The money can only be used for certain expenses that benefit clients.
In this case Genus, which claims to manage $1.3 billion of assets, used $1.67 million between 2009 and 2016 to pay for the development of in-house software. It then transferred the software to a company in exchange for part-ownership of that company and a permanent license to use it.
“Genus did not ensure that the expenditure of soft dollars on software development assisted with investment or trading decisions or with effecting securities transactions on behalf of clients, or that clients were receiving a reasonable benefit given the use and the amount of soft dollars paid,” Brady stated.
The son of founding partner Wayne Wachell was involved in the companies that developed the software and the company that bought it from Genus. This was never disclosed to Genus clients as required under the Securities Act.
Company founding partner Leslie Cliff described the enforcement action as a regrettable oversight.
“I sincerely regret that we failed to disclose this fact at the time,” said Cliff via email.
“For Genus and our clients, the investment in this software development project has been money very well spent. The software has delivered additional fund returns that are orders of magnitude above the development cost. The BCSC has never suggested that the software hasn’t added value to our clients or that we stop using the software,” said Cliff.
Existing clients will receive fee credits while former clients will be paid cash.
In addition to those payments, the BCSC says Genus must disclose the compliance failures to its current and former clients, and hire an independent compliance monitor for at least one year.
