Citigroup Global Markets gets $475k fine for problems related to equity research reports
Citigroup Global Markets Inc (CGMI) has agreed to pay a fine of $475,000 as a part of a settlement with the United States Financial Industry Regulatory Authority (FINRA). The settlement concerns CGMI’s omissions of required disclosures in equity research reports for a period of five years.
CGMI used data feeds from a third-party service provider to identify the firm’s role in transactions for issuers covered by firm research reports. As part of a reasonably designed supervisory system, a firm has a continuing responsibility to oversee, supervise, and monitor the third-party service provider’s performance of covered activities. This requires specific policies and procedures to monitor the third-party service provider’s compliance with the terms of any agreements and to assess its continued fitness and ability to perform the outsourced activities.
From November 2012 to November 2017, the firm tested to confirm that the data feeds were operating properly and that its disclosures matched the data it received from its third-party service provider. It did not, until mid-2017, test whether the data received from the third-party service provider were accurate and complete in the first instance. Likewise, until mid-2017, the firm did not test the accuracy and completeness of its manager/co-manager disclosures in the research reports it published by comparing the disclosures against the public offerings for which the firm or an affiliate acted as manager or co-manager during this time period.
In 2017, during a compliance review, CGMI discovered that the third-party service provider’s data relating to the manager/co-manager disclosure was sometimes inaccurate. During testing performed following identification of the issue, the firm discovered that the vendor data on occasion did not identify the correct entities involved in a relevant transaction, and on other occasions failed to document a relevant transaction altogether.
Those errors caused CGMI’s systems to not disclose that it was a manager or co-manager of an equity public offering as required by NASD and FINRA rules.
As a result of the data errors, between November 2012 and November 2017, the firm omitted approximately 24,800 required manager/co-manager disclosures in 16,850 equity research reports. This accounted for approximately 6.75% of all required manager/co-manager disclosures impacting approximately 4.43% of published equity research reports during this time period. As a result, the firm deprived the investing public of important information regarding conflicts of interest.
Further, CGMI failed to establish and maintain a reasonably designed supervisory system and written procedures to achieve compliance with the manager/co-manager disclosure rules.
FINRA notes the “CGMI’s extraordinary cooperation” for:
discovering the omitted disclosures during a planned compliance review, initiating an internal review prior to detection or intervention by FINRA or another regulator, and self-reporting directly to FINRA staff;
promptly correcting the cause of the omitted disclosures to prevent further omissions;
conducting a five-year lookback to determine the number of omitted disclosures, which required expending significant staff time to manually review voluminous transaction and disclosure data;
voluntarily employing corrective measures, such as changing vendors, revising its supervisory systems, and implementing automated testing with periodic manual checks; and
providing substantial assistance to FINRA’s investigation by maintaining an open dialogue with FINRA staff regarding improvements to supervisory systems, procedures, and controls.
On top of the fine, Citi has agreed to a censure.