9 March 2023

Historical sanctions by the Financial Markets Authority

The Financial Markets Authority’s Enforcement Committee imposes record-breaking fines on a British asset management company and two of its executives for breaches of their professional obligations.


In this case, the British asset management firm H2O AM, and two of its executives were went before the AMF Enforcement Committee for alleged violations relating to the H2O AMF investments on behalf of seven French UCITS. The investments included financial instruments issued by companies of a financial group (the “Financial Group”) and buy & sell back transactions, consisting of immediate purchases coupled with forward securities sells at a previously agreed price and date [1].

In its December 30, 2022, decision, the AMF Enforcement Committee found that all the alleged breaches were grounded [2].


I. The direct acquisitions of securities and investments made in the context of buy & sell back transactions.

Regarding the direct acquisitions of securities, the Enforcement Committee found that the SGP had invested, on behalf of several UCITS, in financial securities issued by the Financial Group even though they were ineligible for the fund’s assets on multiple grounds [3].

H20 AM failed to consider these financial instruments’ lack of liquidity at the time of investments, which compromised the UCITS’ ability to meet unitholders’ redemption requests and violated Articles R. 214-9, I, 6°, 2° and 7° of the Monetary and Financial Code [4].

H2O AM did not have sufficient information to value these financial instruments adequately, thus violating Article R. 214-9, I, 3°(b) of the Monetary and Financial Code. [5]

In addition, the Enforcement Committee held that H2O AM failed to comply with the control ratio (ratio d’emprise) applicable to these UCITS as several of them held more than 10% of debt securities issued by the same issuer of the Financial Group, thereby violating Article R. 214-26, II, 2° of the Monetary and Financial Code [6].

Finally, concerning investments made in the context of the buy & sell back transactions, the Enforcement Committee ruled that H2O AM carried out these transactions involving financial securities issued by companies in the Financial Group, even though they were ineligible for inclusion in the UCITS assets on several grounds. Specifically, the Committee found that H2O AM did not adequately take into account the risks that prevented the funds from unwinding these transactions at their market value, on their initiative, and at any time in violation of Article R. 214-18 of the Monetary and Financial Code. It also found that H2O AM did not consider some of these transactions when calculating the maximum 5% exposure to counterparty risk on a single counterparty, in breach of Article R. 214-18, III, 3° of the Monetary and Financial Code [7].


II. The Enforcement Committee held that the identified violations are attributable to H2O AM executives

The Committee found that H2O AM breaches were attributable to two individuals, the former Managing Director, and the former Director of Investments, under Articles L.621-9 and L.621-15 of the Monetary and Financial Code [8].

Under these two provisions, the Enforcement Committee can sanction individuals acting on behalf of an asset management company who breaches its professional obligations under the applicable laws and regulations. Indeed, the individuals’ professional obligations derive from those of the asset management company since the responsibility to ensure compliance is inherent in acting on its behalf [9].

In this case, the Enforcement Committee noted that the two executives were, at the time of the breaches, members of H2O AM Executive Committee, a body whose statutory mission was to manage the company’s day-to-day business and, more precisely, to manage collective investments, which meant that they had statutory responsibility for managing the funds entrusted to H2O AM [10].

Thus, according to the Enforcement Committee, these two individuals acted on behalf of H2O AM within the meaning of Article L. 621-15 of the Monetary and Financial Code. In other words, H2O AM breaches of its professional obligations were attributable to the two former executives [11].


III. The high financial penalties justified by the specific circumstances of the case

The Enforcement Committee imposed a fine of EUR 75 million with a reprimand (blâme) on H2O AM [12], which is the highest fine ever issued by the AMF.

The Committee also imposed a fine of EUR 15 million on the former Managing Director, and a five-year ban on working as a director of an entity subject to AMF supervision in France and other EU Member States, with branches or services in France. [13]

Similarly, the Enforcement Committee imposed a fine of EUR 3 million with a reprimand on the former Chief Investment Officer. [14]

In determining the appropriate sanctions, the Enforcement Committee considered the following criteria under Article L.621-15 of the Monetary and Financial Code [15]:

  • the gravity and duration of the breaches, [16]
  • the qualifications and degree of involvement of former directors, [17]
  • the defendants’ financial situation, [18] and
  • the damage suffered by investors. [19]

In determining the sanctions, the Enforcement Committee also considered the remedial measures that H2O implemented.

The Enforcement Committee noted that H2O undertook to implement measures recommended in an internal audit to strengthen the risks monitoring department, improve the risk monitoring, structure, and internal processes, and reorganize the company’s capital, governance, and culture. However, the Enforcement Committee emphasized that these could not be considered as remedial measures given that they were not related to H2O AM failure to comply with the operating and investment rules of the French UCITS [20].

Regarding the remedial measures, the Enforcement Committee noted that when the Rapporteur questioned H2O AM for the first time in September 2022 on that topic, they did not mention that they assessed the damage caused to investors, offered them compensation, or took measures to compensate them. However, during the hearing, H2O AM stated that it endowed EUR 133 million to a fund that would act as a counterpart during liquidations and waived EUR 166 million in commission fees. Moreover, the H2O AM stated that they set up an escrow account of EUR 200 million to compensate unitholders [21].

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