The Financial Industry Regulatory Authority (FINRA) has fined Citigroup $ 650,000 for violation of disclosure and supervisory norms involving a stock borrow programme.
In its first enforcement action involving a broker-dealer stock borrow program, the FINRA in a statement said that “it has fined Citigroup Global Markets Inc $ 650,000 for disclosure and supervisory violations relating to the operation of its Direct Borrow Program (DBP).”
FINRA’s investigations found that between January 1, 2005, and November 30, 2008, Citigroup’s DBP borrowed fully paid hard-to-borrow securities owned by the firm’s customers, who were in large part retail customers.
The borrowed securities went into a pool of securities used, among other things, to facilitate Citi’s clients’ short-selling strategies.
The DBP arranged for more than 4,000 loans involving over 770 different securities borrowed from more 2,300 customers. The average annual value of outstanding loans from customers was approximately $ 301 million.
The regulator found Citi failed to adequately disclose, certain material information to customers participating in the DBP, including that the securities were hard-to-borrow, the interest rates could be reduced by the firm and that the brokers received commissions for the duration of the loan.
“Before offering a product to customers, brokerage firms must reasonably ensure that the customers are aware of all of the potential risks associated with the transaction,” FINRA Executive Vice President and Executive Director of Enforcement James S. Shorris said.
“In this case, Citigroup failed to maintain a supervisory system that ensured that such disclosures were made to customers by the firm’s registered representatives and in the firm’s marketing materials,” Mr. Shorris added.
