Citigroup Global Markets (CGMI) has agreed to pay a total of around $11.5 million to settle allegations that over an almost five-year period it showed incorrect recommendations as to whether clients should buy or sell a wide range of stocks.
CGMI agreed to settle Finra’s disciplinary action without admitting or denying wrongdoing. It will pay a $5.5 million fine and at least $6 million in compensation to retail customers. A spokesperson for CGMI says the firm is ‘pleased to have the matter resolved.’
According to Finra, CGMI between February 2011 and December 2015 displayed to its brokers, customers and supervisors inaccurate research ratings for more than 1,800 equity securities – more than 38 percent of those covered by the firm.
An equity research rating reflects a firm’s view on the future performance of a traded security, and a research report gives analysis supporting that opinion. Research opinions can affect individual investment decisions and market prices, Finra officials note in a related letter of acceptance, waiver and consent (AWC).
In its filing, the self-regulatory organization (SRO) alleges that errors in the electronic feed of ratings data CGMI provided to its clearing firm meant CGMI either displayed:
- The wrong research rating – such as a ‘buy’ when the rating was a ‘sell’ or ‘neutral’, or a ‘sell’ when the rating was a ‘buy’ or ‘neutral’
- A rating when CGMI’s research department did not cover the security
- No rating when CGMI’s research department covered the security.
The actual research reports, which were available to brokers, and the research ratings appearing in those reports, as published by CGMI research, were not affected by these errors, Finra says.
The firm’s alleged failure to display accurate research ratings caused its brokers to solicit thousands of transactions inconsistent with the firm’s real ratings, according to the SRO. Brokers also solicited transactions that violated the portfolio guidelines of certain CGMI-managed portfolios, Finra says.
Among other guidelines, those portfolios were prohibited from holding sell-rated securities, and brokers relied on the inaccurately displayed research ratings, resulting in many customers’ portfolios improperly including sell-rated securities, according to Finra.
CGMI supervisors, relying on the inaccurate ratings populated in certain of the firm’s supervisory tools, failed to detect and prevent a substantial number of transactions that were either inconsistent with the firm’s research or violated portfolio guidelines, Finra alleges. The firm also provided customers with inaccurate ratings on thousands of customer statements and email alerts and displayed inaccurate ratings on online portals available to customers, Finra adds.
According to the SRO, CGMI further failed to timely correct the inaccurately displayed ratings, despite numerous red flags alerting various individuals across the firm to ratings inaccuracies for several securities. In addition, it failed to conduct testing reasonably designed to verify the accuracy of research ratings data that it used and distributed, Finra says.
More specifically in terms of the firm’s oversight of its own operations, Finra alleges that CGMI during the period at issue failed to establish and maintain a supervisory system and written supervisory procedures (WSPs) reasonably designed to ensure that it disseminated accurate and complete research ratings to customers, brokers and supervisors.
The SRO says CGMI failed to have systems in place reasonably designed to ensure the firm displayed accurate and complete ratings information in:
- Internal web portals used by brokers in connection with solicited transactions in managed and non-managed accounts
- Customer web portals
- Customer account statements
- Client email ratings alerts
- Supervisory tools used to monitor solicited trades and portfolio transactions.
Finra officials write in the AWC that, in determining the appropriate sanction in this case, the SRO took into consideration that CGMI:
- Self-reported the alleged research rating issues
- Engaged outside counsel to conduct an internal forensic investigation of the relevant issues
- Took steps to prevent the display and use of inaccurate research ratings information
- Provided ‘substantial assistance’ to Finra’s investigation by sharing the results of its internal investigation
- Proposed and developed ‘a substantial remediation plan’ designed to compensate affected customers.
‘Member firms must reasonably ensure that the research rating information they display and on which they rely to supervise business activities is complete and correct,’ says Susan Schroeder, Finra executive vice president and head of enforcement, in a statement. ‘The display and use of incomplete and inaccurate research ratings can have widespread adverse consequences to customers. Even when such inaccuracies are caused by technology problems, firms should react quickly to address those errors.’
Ben Maiden
Ben Maiden is the editor-at-large of Governance Intelligence, an IR Media publication, having joined the company in December 2016. He is based in New York. Ben was previously managing editor of Compliance Reporter, covering regulatory and compliance...
