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From Securities Regulation Daily, August 19, 2015

SEC orders Citigroup to pay $15 million for compliance failures, grants disqualification waivers

By Amanda Maine, J.D.

Citigroup Global Markets, Inc. (CGMI) has agreed to pay a $15 million civil penalty to settle SEC charges that it violated federal securities laws relating to its trade surveillance and compliance procedures. As part of the settlement, CGMI also agreed to retain a consultant to review its trade surveillance and advisory account order handling and routing. The Commission also granted CGMI waivers from disqualification under Rules 405 and 506 (In the Matter of Citigroup Global Markets, Inc., August 19, 2015).

Required policies. CGMI is a registered broker-dealer subject to Exchange Act Section 15(g). As such, it is required to establish, maintain, and enforce written policies reasonably designed to prevent the misuse of material, nonpublic information.

Allegations. According to the SEC, between 2002 and 2012 CGMI did not monitor thousands of trades executed by several of its trading desks because reports that CGMI employees used to review trades were missing thousands of trades. These reports were created electronically and several trading platforms that contained information about the trades were omitted from trade reports used by CGMI for daily surveillance.

In addition to these compliance and surveillance failures, the SEC also alleged that CGMI inadvertently routed more than 467, 000 transactions on behalf of advisory clients to Automated Trading Desk Financial Services LLC (ATD), an affiliated market maker. ATD executed the transactions as a principal at or near prevailing market prices. CGMI attempted to avoid principal transactions executed through ATD, but its policies and procedures were not reasonably designed or implemented and, as a result, over two years it failed to divert certain advisory orders away from ATD. The inadequate policies were unable to prevent the routing of these advisory orders to ATD and the resulting execution of those orders by ATD on a principal basis, the SEC alleged.

Both groups of violations involved “long term-technology problems” that led to CGMI’s inadequate enforcement of compliance and surveillance procedures, according to the SEC.

Settlement and sanctions. The SEC’s order instituting administrative proceedings found that CGMI violated Exchange Act Section 15(g), as well as Advisers Act Section 206(4) and Rule 206(4)-(7), which require registered investment advisers to adopt and implement written policies reasonably designed to prevent violations of the Advisers Act.

To settle the charges, CGMI agreed to pay a $15 million civil penalty. CGMI also agreed to retain a consultant to conduct a review of its surveillance program and its policies and procedures concerning the handling and routing of advisory orders. The consultant will issue a report evaluating the adequacy of CGMI’s policies and procedures and make any necessary recommendations for improvement. In addition, CGMI agreed to be censured and to cease and desist from further violations. CGMI did not admit or deny the SEC’s findings. The SEC acknowledged the remedial acts undertaken by CGMI and its cooperation with SEC staff.

Waivers. The entry of the SEC’s order would disqualify CGMI as a “bad actor” from making use of registration exemptions under Securities Act Regulation D. The order also would disqualify the company from being eligible for well-known seasoned issuer (WKSI) status under Securities Act Rule 405. The SEC granted CGMI waivers from bad actor and WKSI disqualification, determining that under Rule 506, CGMI had made a showing of good cause that it was unnecessary to deny the company the ability to use Regulation D exemptions or to be eligible for WKSI status.

Bad actor and WKSI disqualification waivers have come under criticism recently from SEC Commissioners Luis Aguilar and Kara Stein, as well as Sen. Elizabeth Warren (D-Mass) and Rep. Maxine Waters (D-Cal). However, SEC Chair Mary Jo White and has defended the Commission’s waiver process, and Commissioner Daniel M. Gallagher has called on the SEC to avoid using automatic disqualification as an additional enforcement sanction.

The release is No. 34-75729.

Companies: Citigroup Global Markets, Inc.

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