By Chad M. Kohler, Esq.
It was announced last week that Citigroup Global Markets, Inc. ("Citigroup"), the brokerage arm of Citigroup, Inc.,
was fined $15 million by the Financial Industry Regulatory Authority (FINRA). The fine stems
from alleged supervisory failures relating to Citigroup's handling
of equity research.
Citigroup, formerly known as Salomon Smith Barney, Inc., has been a registered
broker-dealer and member of FINRA since 1936. Citigroup's equity research
department includes approximately 66 analysts, licensed by FINRA, who
write research reports published by Citigroup. The reports usually include
projections for particular companies, target prices, and expected returns.
According to FINRA, Citigroup equity research analysts engaged in "inappropriate
communications" with external clients as well as internal sales and
trading personnel, "including providing non-public research information
…before the research was published."
One example cited by FINRA involved "idea dinners" hosted by
Citigroup's equity research analysts that were also attended by some
of the firm's institutional clients and sales and trading personnel.
At these dinners, Citigroup's research analysts discussed stock picks,
which, in some instances, were inconsistent with the analysts' published
research. Despite the risk of improper communications at these events,
the firm did not adequately monitor analyst communications or provide
analysts with adequate guidance concerning the boundaries of permissible
FINRA stated that such misconduct – which violates federal securities
laws and FINRA rules – was encouraged by Citigroup's compensation
arrangements that rewarded equity research analysts based on feedback
from clients and sales personnel.
In another example, FINRA found that an analyst employed by a Citigroup
affiliate in Taiwan selectively disseminated research information concerning
Apple, Inc., to certain clients, which was then selectively disseminated
to additional clients by an equity sales employee.
In addition to the fine, Citigroup agreed to submit a plan to FINRA within
60 days evaluating its research policies and procedures.
FINRA noted that in settling this matter, Citigroup neither admitted nor
denied the charges, but consented to the entry of FINRA's findings. You can
read the FINRA Letter of Acceptance, Waiver, and Consent here.