The Financial Industry Regulatory Authority announced Monday that it has fined Citigroup Global Markets Inc. $15 million for failing over a nine-year period to adequately supervise communications between its equity research analysts and its clients as well as Citigroup sales and trading staff, which resulted in clients receiving improper access to nonpublic research information.
In addition, Citigroup also failed to have procedures in place expressly prohibiting equity research analysts from assisting issuers in the preparation of road show presentations, and allowed one of its analysts to participate indirectly in two road shows promoting IPOs to investors.
In settling the matter, Citigroup neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
FINRA found that from January 2005 to February 2014, Citigroup failed to meet its supervisory obligations regarding the potential selective dissemination of nonpublic research to clients and sales and trading staff.
Despite the fact that Citigroup issued approximately 100 internal warnings concerning communications by equity research analysts during this period, and detected violations involving selective dissemination and client communications, FINRA says that there were “lengthy delays before the firm disciplined the research analysts and the disciplinary measures lacked the severity necessary to deter repeat violations of Citigroup policies.”
One area where Citigroup failed to supervise certain communications by its equity research analysts involved “idea dinners” hosted by Citigroup equity research analysts that were also attended by some of Citigroup’s institutional clients and sales and trading personnel.
At the dinners, Citigroup 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, Citigroup did not adequately monitor analyst communications or provide analysts with adequate guidance concerning the boundaries of permissible communications,” FINRA states.
“The frequent interactions between Citigroup analysts and clients at events like ‘idea dinners’ created a heightened risk that views inconsistent with research would selectively be disclosed to clients,” said Brad Bennett, FINRA executive vice president and chief of enforcement, in a statement. “Citigroup failed to effectively police these risks.”
FINRA also 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 a Citigroup equity sales employee.
Cameron Funkhouser, executive vice president of FINRA’s Office of Fraud Detection and Market Intelligence, said in the statement that Citigroup “did not enforce the boundaries of permissible communications to ensure that its analysts did not provide certain clients with improper access to nonpublic research information. Investment banking and research departments are guardians of material, nonpublic information and have the responsibility to maintain strict control and protection of that information.”
Moreover, FINRA found that in 2011 a Citigroup senior equity research analyst assisted two companies in preparing presentations for investment banking road shows. Between 2011 and 2013, Citigroup failed to have procedures in place expressly prohibiting equity research analysts from assisting issuers in the preparation of road show presentations.
— Check out SEC, FINRA Enforcement: Citi Global Markets Fined $2 Million on ThinkAdvisor.