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From Securities Regulation Daily, November 24, 2014

Failure to supervise nets Citigroup $15 million fine from FINRA

By John Filar Atwood

Citigroup Global Markets, Inc. must pay $15 million for failing to adequately supervise communications between its equity research analysts and clients and Citigroup sales and trading staff, and for permitting an analyst to participate indirectly in two IPO road shows. The Financial Industry Regulatory Authority (FINRA) imposed the fine. FINRA is also requiring Citigroup to conduct within 60 days a comprehensive review of its policies and procedures in these areas.

Idea dinners. FINRA claims that between January 2005 and February 2014 Citigroup failed to meet its supervisory obligations regarding the possible selective dissemination of non-public research to clients and sales and trading staff. Among other things, Citigroup equity research analysts hosted idea dinners that were also attended by the bank’s institutional clients and sales and trading personnel. At the dinners, FINRA noted, Citigroup research analysts discussed stock picks that sometimes were inconsistent with the analysts’ published research. Despite the risk of improper communications at the dinners, Citigroup did not adequately monitor analyst communications, or provide analysts with adequate guidance concerning the boundaries of permissible communications, FINRA concluded.

In a press release, FINRA also cited the example of an analyst employed by a Citigroup affiliate in Taiwan who selectively disseminated research information concerning Apple Inc. to certain clients. The information was then selectively disseminated to additional clients by a Citigroup equity sales employee, FINRA claimed.

Road shows. According to FINRA, in 2011 a Citigroup senior analyst assisted two companies in preparing IPO road show presentations. In addition, between 2011 and 2013, Citigroup did not expressly prohibit equity research analysts from assisting issuers in the preparation of road show presentation materials.

FINRA noted that Citigroup issued nearly 100 internal warnings concerning communications by equity research analysts, but when violations were detected there were lengthy delays before the firm disciplined the analysts. FINRA also believes that the disciplinary measures were not severe enough to serve as a deterrent against future violations of Citigroup’s policies.

In a letter of acceptance, waiver and consent, Citigroup agreed to settle the matter without admitting or denying the charges. Citigroup did consent to the entry of FINRA’s findings.

Companies: Citigroup Global Markets Inc.; Apple Inc.

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