On July 19, the British Columbia Securities Commission (BCSC) reached a settlement with Genus Capital Management (Genus) about its misuse of over $1.67 million of client brokerage commissions (aka soft dollars) to pay for ineligible services (Settlement). Genus had used the soft dollars to develop proprietary software platforms for its quantitative investing program. A relative of the Genus leadership team was involved with the two companies that Genus paid to develop the software, as well as the third party that ultimately bought the software from Genus.
According to the Settlement, Genus breached National Instrument 23-102 Use of Client Brokerage Commissions (NI 23-102), which does not permit soft dollars to be used to develop proprietary software. It also failed to provide the required disclosure to investors regarding the use of soft dollars. In addition, when it transferring the software to another company in exchange for part ownership, it failed to deal fairly with its clients and breached the conflict of interest provisions in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103).
As part of the Settlement, Genus undertook to:
- repay to its current and former clients the soft dollars it had wrongfully spent (in quarterly instalments over the next four years);
- disclose to its current and former clients the nature of its compliance failures and the associated soft dollar repayments;
- retain an independent compliance monitor; and
- pay $350,000 to the BCSC in annual instalments over four years.