|Thursday, November 13, 2008
Nancy Condon (202) 728-8379
Brendan Intindola (646) 315-7277
Washington, D.C. — The Financial Industry Regulatory Authority (FINRA) announced today that it has fined Citigroup Global Markets, Inc. of New York $300,000 for failing to reasonably supervise the commissions its brokers charged on stock and option trades. Although not part of the formal sanctions, the firm has offered to reimburse affected customers.
One registered representative, Juan Carlos Hernandez, was barred by FINRA earlier this year in connection with the unreasonable commissions.
"Firms have an obligation to supervise with a view to compliance with FINRA rules as well as the firms' own policies and procedures, including those governing commissions on customer orders," said Susan Merrill, FINRA Executive Vice President and Chief of Enforcement. "In this case, Citigroup failed to instruct its brokers and supervisors as to the appropriate factors to take into consideration when they chose to compute commission charges that varied from the firm's commission schedule. The firm also lacked adequate controls to prevent its brokers from charging more than what the firm had determined should be the reasonable commission for a trade."
FINRA found that between 2002 and 2007, Citigroup utilized a "Commission Calculator" that computed commission charges on stock and options trades, taking into account certain factors such as the price of the security and the number of shares or options in the transaction. But FINRA found that prior to October 2007, Citigroup did not formally communicate the existence of its calculated commission rates to its brokers, nor did it ever communicate that the firm generally did not permit brokers to charge commissions that exceeded the rates the firm determined to be reasonable. In addition, there was effectively no firm-imposed limitation on the commissions a registered representative could charge for options trades. A sample of trading, including options trades, revealed commissions in excess of 20 percent for a small number of option trades.
In the case of those commissions which exceeded the firm's calculated rates, Citigroup had no policies or procedures to identify and determine the appropriateness of the commissions pursuant to FINRA rules regarding the factors to consider in determining the fairness of commissions. Those factors include the price of the security and the amount of money involved in the transaction.
Citigroup also had no related supervisory procedures for its branch or regional supervisory employees. Branch management at the three branches investigated by FINRA Enforcement did not supervise for excessive commissions on individual trades on a regular basis.
As a consequence of the firm's inadequate supervision, during the period from April 2002 to January 2006, representative Hernandez charged approximately 27 customers commissions that were substantially in excess of the firm's calculated rate for appropriate charges. He overcharged one customer approximately $1.2 million. In February 2006, the firm terminated Hernandez's employment. In March 2008, in a separate action by FINRA, Hernandez consented, without admitting or denying the charges, to findings against him and he was barred. Two other registered representatives in different branch offices also overcharged commissions on a repeated basis, but on a smaller scale.
In concluding this settlement, Citigroup neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA's BrokerCheck. FINRA makes BrokerCheck available at no charge. In 2007, members of the public used this service to conduct 6.7 million reviews of broker or firm records. Investors can access BrokerCheck at www.finra.org/brokercheck or by calling (800) 289-9999.
FINRA, the Financial Industry Regulatory Authority, is the largest non-governmental regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business-from registering and educating all industry participants to examining securities firms; writing and enforcing rules and the federal securities laws; informing and educating the investing public; providing trade reporting and other industry utilities; and administering the largest dispute resolution forum for investors and registered firms. For more information, please visit our Web site at www.finra.org.