The Financial Industry Regulatory Authority has fined Citigroup Global Markets $5.5 million and required the firm to pay at least $6 million in compensation to retail customers for displaying inaccurate research ratings for numerous equity securities during a nearly five-year period, and for related supervisory violations.
“Member firms must reasonably ensure that the research rating information that they display and on which they rely to supervise business activities is complete and correct. The display and use of incomplete and inaccurate research ratings can have widespread, adverse consequences to customers,” FINRA Executive Vice President and Head of Enforcement Susan Schroeder said in a statement. “Even when such inaccuracies are caused by technology problems, firms should react quickly to address those errors.”
An equity research rating reflects a firm’s opinion of the future performance of a public security. CGMI disseminated its research ratings to customers on account statements, email alerts and an online portal. CGMI brokers and supervisors, meanwhile, relied on internally disseminated research ratings to make security recommendations and to monitor customer transactions and portfolio allocations.
FINRA found that from February 2011 through December 2015, CGMI displayed to its brokers, retail customers and supervisors inaccurate research ratings for more than 1,800 equity securities—more than 38 percent of those covered by the firm. Because of errors in the electronic feed of ratings data that the firm provided to its clearing firm, the firm either displayed the wrong rating for some covered securities (e.g., “buy” instead of “sell”), displayed ratings for other securities that CGMI did not cover or failed to display ratings for securities that CGMI, in fact, rated. The firm’s actual research reports, which were available to brokers, and the research ratings appearing in those reports, were not affected by these errors.
The inaccuracies in the research ratings feed had widespread, adverse consequences. As a result of the errors, CGMI brokers solicited thousands of transactions inconsistent with the firm’s actual ratings and negligently made inaccurate statements to customers about those ratings. They also solicited transactions that violated certain firm-managed portfolio guidelines, which were premised on CGMI research ratings. For example, the portfolios were prohibited from containing equity securities the firm had rated “sell.”
Because CGMI brokers relied on inaccurately displayed ratings, many customers’ portfolios improperly included “sell”-rated securities. CGMI supervisors, relying on those same inaccurate ratings, failed to detect and prevent a substantial number of transactions that were actually inconsistent with CGMI research or portfolio guidelines. The firm also made materially inaccurate statements and omissions regarding more than 19,000 research ratings on customer account statements, sent more than 1,000 customer email alerts with inaccurate ratings, and displayed inaccurate ratings on online portals available to customers.
The firm failed to timely correct the inaccurately displayed ratings, despite numerous red flags alerting the firm to ratings inaccuracies for several securities. The firm also failed to conduct testing reasonably designed to verify the accuracy of research ratings data that it used and distributed.
In assessing sanctions, FINRA has recognized CGMI’s cooperation, including, among other things, that the firm self-reported the research rating issues to FINRA, established a remediation plan to compensate affected customers, and provided substantial assistance to FINRA in its investigation. In settling this matter, CGMI neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
This is not CGMI’s first time getting in trouble with regulators. In November 2014, FINRA fined CGMI $15 million for failing to adequately supervise communications between its equity research analysts and its clients and Citigroup sales and trading staff. Then in August 2015 CGMI paid 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.