Citigroup Global Markets Inc. was censured and fined $725,000 this month by the Financial Industry Regulatory Authority (FINRA) for its failure to comply with disclosure requirements.
From January 2007 through about March 2010, Citigroup Global failed to comply with the disclosure requirements of Rule 2711 of the National Association of Securities Dealers (NASD), a predecessor to FINRA.
The rule requires, among other things, a firm’s research reports and analysts’ public appearances to disclose the firm’s and the analysts’ ownership of any subject company, as well as any other material conflicts of interest with respect to the company. A firm must also disclose whether it acted in the capacity of a manager or co-manager of a public offering, any compensation received from the subject company, and its status as a market maker in the subject company’s securities. Rule 2711 also requires research reports to include price charts and certain other disclosures.
Letter of Acceptance Waiver and Consent
The compliance failures were mostly caused by programming and other technical errors, according to a Letter of Acceptance Waiver and Consent (AWC) submitted by Citigroup Global to settle the matter. Through the AWC, FINRA’s finding were entered in the record, but Citigroup neither admitted nor denied them. FINRA accepted the AWC on Jan. 18.
Citigroup Global
A registered broker-dealer based New York with offices throughout the United States, Citigroup Global provides a full range of financial services including research. It is a wholly-owned subsidiary of Citigroup Financial Products Inc. and, indirectly, a wholly-owned subsidiary of Citigroup Inc.
During the period in question, Citigroup Global published roughly 80,000 research reports each year providing general information on about 3,000 companies and more quantitative or technical research on 14,000 additional companies.
Due to its failure to implement adequate policies and procedures, Citigroup Global did not make the disclosures required in these tens of thousands of reports, the AWC said.
For instance, Citigroup Global’s disclosure management system had no means built in to make sure that the information in its reports was accurate and current. The supervisory system also failed to ensure that the firm was complying with the terms of a previous settlement regarding its research analysts. This was a global settlement entered with a number of firms in 2003, according to FINRA public disclosure records.
The AWC details the previous disciplinary actions against Citigroup Global. In 2003, as part of the settlement mentioned above, NASD found that Citigroup Global had committed a long list of violations including the publishing of research reports containing fraudulent, exaggerated or unwarranted assertions.
Per the findings in the 2003 action, Citigroup also made recommendations without a reasonable basis, did not maintain policies reasonably designed to prevent the misuse of material, non-pubic information, and failed to adequately supervise its research analysts, among other things.
Citigroup Global Violations & Fines
To settle these charges, Citigroup agreed to pay a total of $400 million, which included a $150 million fine, disgorgement of $150 million, $75 million to obtain independent research, and $25 million for investor education.
Then in 2006, NASD entered findings of numerous violations of Rule 2711. Citigroup Global neither admitted nor denied the findings, which involved technical or quantitative research reports issued by the firm that failed to disclose whether there were any conflicts of interest and whether Citigroup had acted as a market maker for the stock, among other things. NASD also found a failure to supervise.
Citigroup Global consented to a censure and $350,000 fine to settle the matter. The firm also agreed to perform a comprehensive review of disclosure in its technical and quantitative reports and certify in writing to the NASD that it had complied with the disclosure requirements of Rule 2711.
Now, FINRA has found that Citigroup Global once again violated NASD Rule 2711. First, the firm failed to disclose in research reports that it had a role in managing public offerings for some companies on which it issued reports.
As the AWC noted, it appears to have been a technical problem. Citigroup Global relied on data received from a third-party vendor, but the security identification information possessed by the vendor’s and by Citigroup Global’s disclosure management system did not match. This meant that for almost the entire year of 2007, Citigroup Global did not incorporate the vendor’s data into its disclosures and so failed to disclose in its research reports that it played a role in the public offering of companies covered in the reports. The disclosures were missing from 8 percent of the roughly 80,000 research reports the firm issued that year.
In addition, in about 330 reports issued from September 2009 to March 2010, Citigroup Global failed to disclose investment banking revenue it received from the companies covered by the reports, the AWC said.
The firm also failed to disclose its status as a market maker in about 800 reports, according to the AWC. Acting as a market maker means holding a certain number of shares of a given stock in order to facilitate trading in that stock, and in the hopes of profiting from the spread between the buying and selling price. This was another disclosure violation traced to mismatched security identification information.
Other disclosure violations found by FINRA included failure to disclose financial interests and ownership interests in about 1,800 of its 17,000 covered companies, failures to include price charts and conflict disclosure charts in research reports due to human and technical error, and the failure to provide any conflict disclosures at all in its reports regarding exchange traded funds, the AWC said.
Finally, pursuant to a the research analyst settlement previously signed by Citigroup Global in 2003, the firm was required to make three disclosures on the front page of its research reports, the AWC said.
First, the reports had to note potential conflicts of interest between the firm and a covered company. Second, they had to state the availability of independent research as mandated by the final court judgment that led to the settlement. Third, information had to be supplied as to the weight a research report should be given when making an investment decision.
Citigroup Disclosure Violations
Citigroup Global failed to make these disclosures on the front page of its reports, and failed to provide any information at all on independent research.
While the disclosure violations detailed above were largely the result of error, FINRA found that Citigroup Global failed to maintain a supervisory system reasonably designed to detect and prevent them. In particular, the firm failed to monitor its disclosure management system regarding the timeliness and efficacy of data coming from third-party and internal sources. The system relied on this data to make the required disclosures.
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