A broker-dealer affiliate of Citigroup and a former Citi broker-dealer agreed to pay a total of nearly $2 million as part of a settlement with the Securities and Exchange Commission (SEC) resolving allegations they violated the disclosure obligations of Regulation Best Interest (Reg BI).
Citigroup Global Markets and Citi International Financial Services were found by the SEC to have made securities recommendations without following proper client relationship summary (CRS) form guidance, the agency alleged in an administrative proceeding published Thursday.
The alleged violations occurred before Citi International Financial Services was sold to Insigneo Financial Group in August 2022. The firm is now named Insigneo International Financial Services.
The details: From when Reg BI’s disclosure obligations took effect in June 2020 to at least March 2021, the two Citi affiliates used implied consent and defaulted their approximately 360,000 accounts belonging to existing retail customers to electronic delivery of required disclosures, the SEC alleged in its order.
This clashed with guidance published by the SEC in 2019, which stated it is “generally not appropriate for broker-dealers to rely on implied consent to meet the requirement that the broker-dealer receive evidence of delivery,” the agency noted.
The Citi affiliates mailed the required disclosures and Form CRS to their existing retail customers in April 2021 but not before they had made approximately 31,600 securities recommendations to approximately 13,600 customers without meeting the mandates put forward by the SEC, per its order.
Compliance considerations: The Citi affiliates established a steering forum to discuss how to provide Reg BI disclosures in advance of the June 2020 compliance date. The forum reached the determination to amend customer agreements to provide for a default to electronic delivery of the Reg BI disclosures and Form CRS, the SEC noted.
The firms were found to not have proper policies and procedures designed to achieve compliance with Reg BI regarding existing customers.
The firms now require their registered representatives to request oral consent to electronic delivery from customers using a consent and disclosure script, per the SEC.
Citi declined to comment. The firms settled with the SEC without admitting or denying its findings.