Order in the matter of HSBC Mutual Fund Distributor

WTM/SR/IVD/ID-I/35 /07/2014 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA, MUMBAI CORAM: S. RAMAN, WHOLE TIME MEMBER ORDER Under Section 11, 11(4) and 11B of the SEBI Act, 1992 read with Regulation 11 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 in the matter of HSBC Mutual Fund Distributor.

1. Securities and Exchange Board of India (SEBI) received a complaint dated January 01, 2013 from Ms.Suchitra Krishnamoorthi (hereinafter referred to as “the complainant”) against the Hongkong and Shanghai Banking Corporation Limited (hereinafter referred to as the "Noticee") a Mutual Fund distributor. The complainant had inter-alia alleged that on account of the actions on the part of the Mutual Fund distributor, the complainant suffered losses.

2. Upon receipt of the said complaint, SEBI initiated investigations for the period June 18, 2004 to February 28, 2011 (hereinafter referred to as “investigation period”) to ascertain whether there was any violation of SEBI Portfolio Management Service (PMS) Regulations, 1993, and Code of Conduct for Mutual Fund Distributors and SEBI Act, 1992 by the Noticee with regard to the Mutual Funds transactions in the complainant's account. Since, it was noted from the replies of the Noticee that it did not act as a Portfolio Manager but is a registered Association of Mutual Funds India (AMFI) distributor with No.ARN-0022. Accordingly, an investigation was carried out to ascertain whether there was any violation of Code of Conduct for Mutual Fund Distributors, SEBI (Prohibition of Fraudulent and Unfair Trade Practices) PFUTP Regulations, 2003 (hereinafter referred to as 'PFUTP Regulations') and SEBI Act, 1992 by the Noticee with regard to the Mutual Fund transactions done on behalf of the complainant.

3. During the course of investigation, the following was observed :

a. The complainant was registered with the Noticee as a client of Retail Banking and Wealth Management Services.

b. The Mutual Fund portfolio worth `5 lakh was created in June 2004 as per the bank statements of the complainant submitted by the Noticee. On September 06, 2006, November 23, 2006 and December 07, 2006, `1.4 crores, `2.2 crores and `15 lakh respectively were deposited in the complainant's account. On January 11, 2007, `5 lakh was also deposited in the complainant's account. These funds were used to invest in the Mutual Fund portfolio of the complainant.

c. It was revealed in the investigation that there was excessive churning in the portfolio of the complainant. The complainant's money had been invested in 38 different schemes of various Mutual Funds. Some of the investments were also not in line with the risk profile of the complainant.

d. It is also seen that a large number of the investments made in Mutual Fund Schemes were redeemed in a short span of time and on many instances redemption proceeds were used to invest in similar Mutual Fund Schemes.

4. The total commission/charges earned by the Noticee against transactions in the name of the complainant was `27,93,844.60.

5. In view of the same, it was alleged in SEBI’s Show Cause Notice no.IVD/ID- 1/PM/AC/HSBC/28131/2013 dated November 01, 2013 that the Noticee violated the provisions of Regulations 3 (a), (b), (c) and (d) and 4(1) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 and SEBI’s Circular No. MFD/CIR/06/210/2002 dated June 26, 2002 prescribed under Regulation 77 of the SEBI(Mutual Funds) Regulations, 1996 read with Clauses 1, 9 and 13 of the Code of Conduct of Intermediaries of Mutual Funds.

6. The Noticee vide its reply dated December 10, 2013 stated the following :

I. The Noticee did not make investments on behalf of the client and acted pursuant to the Client's specific instructions (LOI).

II. Transactions undertaken by the Noticee in relation with the complainant were in its capacity as Mutual fund distributor and not as a portfolio manager. III. Profiling of a client is based on standard questions put to them based on templated formats. This is merely a subjective assessment and cannot be basis of all investment decisions of the client.

7. Considering the reply submitted by the Noticee, an opportunity of personal hearing was granted before me on March 5, 2014. Advocate Somasekhar Sundaresan of J Sagar Associates appeared on behalf of the Noticee. It was submitted by the Noticee that efforts were on to settle the matter amicably with the complainant. On the basis of the said submissions, the matter was adjourned. Subsequently, the Noticee vide its letter dated March 20, 2014 informed SEBI that the matter has been amicably settled. The Complainant vide letter dated July 1, 2014 also stated that the matter has been settled with regard to the complaint against the Noticee.

8. Considering the fact that the complainant’s grievance has been redressed amicably by the Noticee and taking into account the fact that the proceedings were initiated vide the said Show Cause Notice no.IVD/ID-1/PM/AC/HSBC/28131/2013 dated November 01, 2013, solely on the basis of the complaint, I am of the view that no further directions are required as against the Noticee in this matter. Hence, the Show Cause Notice is disposed of without any further directions in the matter.

Place : Mumbai S RAMAN Date : July 28, 2014 WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA