Genus Capital Management Inc. [Settlement Agreement]
BCSECCOM #:2019 BCSECCOM 241
Document Type:Settlement Agreement
2019 BCSECCOM 241
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Genus Capital Management Inc.
Securities Act, RSBC 1996, c. 418
- The Executive Director of the British Columbia Securities Commission (the Executive Director) and Genus Capital Management Inc. (Genus) agree as follows:
Agreed Statement of Facts
1. Genus is a British Columbia registered portfolio manager, investment fund manager and exempt market dealer. Genus has been registered with the Commission since 1989.
2. Genus’ head office is located in Vancouver, B.C.
Ineligible Use of Soft Dollars
3. Between 2009 and 2016, Genus used over $1.67 million of client brokerage commissions (commonly referred to as “soft dollars”) to pay for ineligible services. Genus used a significant portion of the soft dollars to develop two proprietary software platforms.
4. Genus intended to use the software platforms for research in support of Genus’ quantitative investing programs. Although payments for the use of established software and databases for order execution or research purposes can be eligible uses of soft dollars, the development of proprietary software is not an eligible use.
5. 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.
6. Genus did not provide disclosure to clients regarding their use of soft dollars in the manner required by the Securities Act.
7. As a result of the above activity, Genus breached sections 3.1(1), 3.1(2), and 4.1(1) of National Instrument 23-102 Use of Client Brokerage Commissions.
Breach of Duty of Care
8. Genus ultimately transferred the intellectual property relating to one of the software platforms to a third party company, in exchange for partial ownership of the third party company, and a perpetual license allowing free use of the intellectual property for Genus clients.
9. By allowing client soft dollars to be used for ineligible software development services, and then transferring the resulting software platform to a related third party company, Genus failed to deal fairly with clients contrary to section 14 of the Securities Rules, and to exercise the required degree of care, diligence and skill contrary to section 125 of the Act.
Conflict of Interest
10. The majority of ineligible services paid for with soft dollars were provided by two companies that had a familial connection with one member of the Genus leadership team.
11. The third party purchaser of the intellectual property paid for with soft dollars also had a familial connection with the Genus leadership team.
12. These are material conflicts of interest that triggered Genus’ conflict of interest obligations under the Act.
13. Genus failed to avoid, control or disclose the ongoing conflicts of interest to its clients in the manner required by section 13.4 of National Instrument 31-103.