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Citigroup Brokerage Unit Fined $15 million for Supervisory Failures Relating to Equity Research

Meyer Wilson

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 communications.

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.