Citigroup gets fined for alleged violations in preferred transactions

By Susanna Moon

Chicago, Aug. 26 – Financial Industry Regulatory Authority (Finra) said it has issued Citigroup Global Markets Inc. a fine of $1.85 million for alleged violations in deals involving non-convertible preferred securities.

The New York-based bank also was ordered to pay more than $638,000 in restitution plus interest to affected customers.

The company allegedly failed to provide “best execution” in about 22,000 customer transactions involving non-convertible preferred securities and for related supervisory deficiencies for more than three years, according to a Finra press release.

In the settlement, Citigroup neither admitted nor denied the charges but consented to the entry of Finra’s findings, the press release noted.

At the center of the alleged violation, according to Finra, was a Citigroup trading desk that used a manual pricing methodology for non-convertible preferred securities that failed to incorporate the National Best Bid and Offer (NBBO) for those securities.

Accordingly, Citigroup priced more than 14,800 customer transactions worse than the NBBO, Finra said.

Also, Citigroup priced more than 7,200 customer transactions worse than the NBBO because the firm’s proprietary BondsDirect order execution system used a “faulty pricing logic that only incorporated the primary listing exchange’s quotation for each non-convertible preferred security,” Finra continued.

Because securities trade on multiple exchanges, Citigroup missed the possibility of a better price for that security on an exchange other than its primary listing exchange, Finra noted.

Finra said that, in any customer transaction, a firm or its registered persons must use “reasonable diligence to ensure that the purchase or sale price to the customer is as favorable as possible under current market conditions.”

Supervisory procedures

Citigroup’s supervisory system and written supervisory procedures for best execution in non-convertible preferred securities also were alleged to be deficient, according to Finra.

Citigroup failed to perform any review of customer transactions in non-convertible preferred securities executed on BondsDirect or manually by the trading desk to ensure compliance with the firm’s best execution obligations, the release noted.

Finra said that the firm failed to conduct these supervisory reviews even though it had received several inquiry letters from Finra staff.

And, although many of these transactions were identified on Finra’s best execution report cards, the firm supposedly attempted to access its best execution report cards only once during the relevant period, according to the Finra release.

“Citigroup lacked the necessary systems and supervision to ensure that it provided customers with the executions they deserved and, as a result, customers were receiving inferior prices for more than three years,” Thomas Gira, Finra executive vice president and head of market regulation, said in the press release.

Finra will continue to pursue firms that “neglect their duty of best execution,” Gira said.

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