June 17, 2021
When it comes to Wall Street's Big Fish, FINRA is oh-so cautious and oh-so solicitous before asserting that the firm has prior, relevant disciplinary history, But that same caution and that same solicitousness just doesn't arise for FINRA's smaller firms or the industry's hundreds of thousands of registered persons. Pointedly, when the charge of failed supervision raises its ugly head, it seems that if a Large Member Firm is involved, only that firm's name appears in FINRA's regulatory caption; but when that same violations occurs at smaller broker-dealers, we often seen the names of individual C-suiters, compliance staff, and supervisors tagged as Respondents.
Case in Point
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Citigroup Global Markets Inc. ("CGMI") submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Citigroup Global Markets Inc., Respondent (FINRA AWC 2019064316401)
The AWC alleges that CGMI has been a FINRA member firm since 1936 with 7,000 registered representatives at 725 offices. The AWC alleges that CGMI "does not have any relevant disciplinary history."
Failed Supervisory System
The "Overview" portion of the AWC asserts:
During the period from at least June 2017 to February 2019, CGMI failed to establish and maintain a supervisory system, including written supervisory procedures, reasonably designed to monitor its employees' outside brokerage accounts. The firm's supervisory deficiencies led to its failure to timely monitor thousands of employee outside brokerage account statements for compliance with the firm's trading restrictions designed to identify conflicts of interest, misuse of material non-public information (MNPI), and insider trading. By virtue of the foregoing, CGMI violated FINRA Rules 3110(a), 3110(b), 3110(d) and 2010.
The AWC offers another summary (additional details are offered in follow-on sub-headings) of its allegations:
CGMI's written supervisory procedures required employees to disclose their personal brokerage accounts to the firm. For employee accounts held in-house at the firm or with certain preferred outside brokers, employees were not required to obtain pre-approval from the firm's Internal Compliance Risk Management group (ICRM) in order to open or maintain an account. ICRM approval to open or maintain an account was required for all other accounts (non-preferred accounts). Once an employee disclosed an in-house or preferred account, the employee's trade data was directly electronically fed into the firm's Employee Due Diligence system (EmDD), which was the firm's primary system for monitoring employee trading. For those accounts for which the firm did not have access to an electronic feed, the firm required employees to manually upload PDF statements to EmDD on a periodic basis. CGMI also required employees to upload PDF statements (1) electronic accounts for the period after the employee joined CGMI until the electronic feed was set up, and (2) where the firm rejected an employee's request to maintain a non-preferred account, for the period from the employee's coverage date until the account was closed. Thus, a significant percentage of employee outside brokerage accounts required PDF statements for at least some period. PDF statements uploaded by employees were to be reviewed by (1) ICRM and (2) the employee's supervisor.
From at least June 2017 to February 2019, CGMI failed to have in place a supervisory system, including written procedures, reasonably designed to ensure that employees timely uploaded PDF statements and that the firm timely reviewed employees' personal trading. The firm's delay in timely reviewing PDF statements was attributable to three systemic supervisory issues described below.
at Pages 2 - 3 of the AWC
In accordance with the terms of the AWC, FINRA imposed upon CGMI a Censure and a $350,000 fine.
Bill Singer's Comment
Smells like disparate regulation. If these same supervisory failures for which CGMI was cited had transpired at a smaller member firm, FINRA would likely have gone head hunting for some human being -- a CEO, a CCO, any number of supervisors -- and heads would have rolled via fines and suspensions. But that's never quite the case with the big boys.
Isn't it amazing that CGMI has been a FINRA member firm since 1936 and has mushroomed to the size of thousands of reps at hundreds of branches but just doesn't have any prior relevant disciplinary history according to the 2021 AWC?
As of June 17, 2021, FINRA's online BrokerCheck discloses under the heading "Regulatory Event" that CGMI has amassed 548 "Final" matters (oh, and just to toss it in here, 639 arbitrations).
548 final regulatory events and not a single one was deemed "relevant" to CGMI's June 2021 AWC.
I find it hard to imagine -- in fact, let me say it bluntly: FINRA's assertion is bull-shit.
CGMI has been cited in the past for various failures to "establish and maintain a supervisory system reasonably designed . . ." For example, as set forth less than a year ago in the "Overview" for In the Matter of Citigroup Global Markets Inc., Respondent (FINRA AWC 2018057389701 / December 17, 2020)
From July 1, 2009 to October 31, 2017, CGMI failed to establish and maintain a supervisory system reasonably designed to supervise representatives' recommendations to customers to purchase particular share classes of 529 savings plans in violation of MSRB Rule G-27. Specifically, CGMI's supervisory system was not reasonably designed to supervise 529 share-class recommendations executed through transactions made directly with plan fund companies.
As more fully described below, the Department of Enforcement credits CGMI for its extraordinary cooperation. Accordingly, this AWC includes an order for restitution of approximately $514,932, plus interest and a censure, but no fine.
It just never ends, does it? FINRA's regulatory myopia blurs its vision and prevents the regulator from fully seeing the harmful impact of its duplicitous conduct. Large Member Firms get credit for their "extraordinary cooperation." Sometimes, Large Member Firms don't even have to pay a fine -- they just pony up something dubbed as "restitution." And even after FINRA displays its largesse, the Large Member Firms persist in failing to establish and maintain a reasonably designed supervisory system. But that's okay with FINRA because, well, hey, let's not be in a rush here to label all past misdeeds by any Large Member as "relevant." Hell no. Let's all try to get along here and work things out. Provided, of course, you're a powerful firm with influence. It's the least we can do. If you're a Small Member Firm or piddling registered person without power and influence, well, everything that's past is prologue and all your prior misdeeds are relevant to whatever is now on FINRA's plate.