Citigroup Global Markets Inc. a securities broker dealer headquartered in New York New York has been censured and fined $200,000.00 by Financial Industry Regulatory Authority (FINRA) based upon allegations that (1) Citigroup overcharged its customers in regard to their purchases of unit investment trusts and (2) Citigroup failed to supervise the unit investment trust transactions placed in customers’ accounts. Letter of Acceptance Waiver and Consent No. 2016050947701 (June 20, 2019).
According to the AWC, between February of 2011 and February of 2017, Citigroup failed to detect and process discounts for customers with respect to their purchases of unit investment trusts. Evidently, a total of one thousand four hundred seventy-six transactions contained fees or charges that were supposed to be discounted. Particularly, the customers who executed the purchases were eligible for a rollover discount if not for being eligible for a breakpoint discount; however, nearly six hundred of the discounts did not get applied. Consequently, FINRA stated that the customers were assessed a total of $152,488.59 in excess sales charges. FINRA concluded that Citigroup’s conduct in this respect was violative of FINRA Rules 2010.
The AWC further stated that Citigroup neglected to supervise its business practices concerning unit investment trust transactions in a manner which was compliant with FINRA rules as well as securities regulations and laws. In particular, there were inadequate supervision systems or procedures governing the application of rollover discounts for customers who were eligible for those discounts. In fact, the AWC stated that rollover discounts had not even been referenced within the written supervisory procedures utilized by Citigroup. The AWC additionally stated that there were no tools used by the firm to monitor rollover discount applicability – at least not until April of 2017.
FINRA also indicated that Citigroup neglected to create and implement supervision systems and written supervisory procedures with a view towards ensuring that stockbrokers’ unit investment trust trading was adequately monitored by the firm’s personnel. In particular, the firm utilized two systems – a pre-trade system and post-trade system – for purposes of detecting unsuitable switches of unit investment trusts; however, Citigroup depended on its stockbrokers to provide the firm information in order for the firm’s supervisory process to work. That is, Citigroup was only able to supervise the trades when stockbrokers self-reported unit investment trades that had been effected in a customer’s account in the prior two months.
Additionally, Citigroup neglected to test its supervision system to ensure it picked up on red flags concerning the trading of unit investment trusts on a short-term basis. As a result, the firm was reportedly unaware that its post-trade system was flawed – that system did not register red flags associated with unit investment trusts because unit investment trusts were excluded from Citigroup’s systems at the time the system was implemented in 2011. Evidently, it was not until April of 2017 that the firm began incorporating unit investment trust switches into the post-trade system. FINRA found the firm’s supervisory failures to be violative of FINRA Rules 2010, 3110 and National Association of Securities Dealers (NASD) Rule 3010.
