Citigroup Global Markets today agreed to pay a $15 million penalty to the Securities and Exchange Commission to settle charges that it failed to enforce policies and procedures to prevent and detect securities transactions that could involve the misuse of material, nonpublic information.
Federal securities laws require firms to take reasonable steps to prevent the misuse of material nonpublic information. According to the SEC, Citigroup did not review thousands of trades executed by several of its trading desks from 2002 to 2012. Personnel used electronically generated reports to review trades on a daily basis, but technological errors caused the reports to omit several sources of information about thousands of relevant trades, the SEC said.
“Today’s high-speed markets require that broker-dealers and investment advisers manage the convergence of technology and compliance,” said Andrew Ceresney, Director of the SEC’s Division of Enforcement. “Firms must ensure that they have devoted sufficient attention and resources to trade surveillance and other compliance systems.”
Additionally, the SEC said that Citigroup inadvertently routed more than 467,000 transactions on behalf of advisory clients to an affiliated market maker, which then executed the transactions on a principal basis by buying or selling to the clients from its own account. Citigroup also failed to design and implement policies and procedures to avoid such occurrences and failed to divert certain advisory orders away from this affiliate.
“Citigroup’s trade surveillance failed to detect these principal transactions for more than two years because the firm relied upon a report that was not reasonably designed to capture the principal transactions executed through this affiliate,” the SEC said.
The SEC’s order finds that Citigroup violated Section 15(g) of the Securities Exchange Act, which requires brokers and dealers to establish, maintain, and enforce policies and procedures to prevent the misuse of material, nonpublic information. Citigroup also violated Section 206(4) of the Investment Advisers Act and Rule 206(4)-(7), which require registered investment advisers to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and its rules.
In addition to the $15 million penalty, Citigroup agreed to retain a consultant to review and recommend improvements to its trade surveillance and advisory account order handling and routing. Without admitting or denying the findings, Citigroup consented to the SEC’s order that censures the firm and requires it to cease and desist from committing or causing these violations.
Earlier this week, two Citigroup affiliates—Citigroup Global Markets and Citigroup Alternative Investment—reached a $180 million settlement with the SEC to settle charges that they defrauded investors in two hedge funds by claiming they were safe, low-risk, and suitable for traditional bond investors. The funds later crumbled and eventually collapsed during the financial crisis.