FINRA Lawyer Blog
FINRA recently sanctioned Citigroup Global Markets Inc. $11.5 million over inaccurate research rating displays. The sanction includes a $5.5 million in fines and $6 million in compensation for wronged retail customers.
According to the SRO’s findings, over at least five years, Citigroup displayed inaccurate research ratings for a large number of equity securities, also incurring several related violations.
Firms communicate their equity research ratings to share their opinion about the projected performance of public securities. The ratings are included in emails to customers, account statements, and official websites. They are also disseminated internally, to inform brokers’ recommendations to customers.
FINRA found evidence that the research ratings shared by Citigroup with customers differed from those shared with brokers internally.
The alleged misconduct went on from February 2011 till December 2015. In some cases, securities were rated as “buy” instead of “sell,” a discordance which may have directly caused significant losses to investors. The errors were observed in publicized ratings for over 1,800 securities, which amount to “38 percent of those covered by the firm,” according to FINRA.
FINRA claims that,
“As a result of the errors, brokers solicited thousands of transactions inconsistent with the firm’s actual ratings and negligently made inaccurate statements to customers about those ratings. They also solicited transactions that violated certain firm-managed portfolio guidelines.”
According to the SRO, Citigroup made,
“materially inaccurate statements and omissions regarding more than 19,000 research ratings on customer account statements, sent more than 1,000 customer email alerts with inaccurate ratings, and displayed inaccurate ratings on online portals available to customers.”
FINRA believes there were sufficient red flags for Citigroup to make efforts to correct the rating inaccuracies. For FINRA’s Head of Enforcement Susan Schroeder, “The display and use of incomplete and inaccurate research ratings can have widespread, adverse consequences to customers. Even when such inaccuracies are caused by technology problems, firms should react quickly to address those errors.”
J.P. Morgan Fined for violating SEC’s Customer Protection Rule
FINRA found evidence that between March 2008 and June 2016, J.P. Morgan failed to comply with the SEC’s Customer Protection Rule, which protects investors from potential broker-dealer insolvency by requiring firms to “maintain physical possession or control over certain of [their customers’ owned] securities”. As per the rule, “a firm cannot use segregated securities for its own purposes.”
Due to systemic flaws and failing supervision, “shares that should have been segregated were available for the firm’s use,” FINRA said in a statement.
J.P. Morgan’s failure to maintain securities in appropriate control locations caused significant deficits. In one example cited by FINRA, the firm failed to “move Italian securities to a good control location for nearly two years.”
This allegedly resulted in a $146 million deficit in Italian securities on a sample day.
Schroeder also commented on J.P. Morgan’s behavior: “The Customer Protection Rule is an important component of investor protection, and member firms must have reasonably designed and maintained systems and procedures to comply with the possession and control requirements.”
In its information releases, FINRA praised both J.P. Morgan’s and Citigroup’s collaboration in investigating misconduct and working towards compliance.
Compliance problems? Are you or is your firm a FINRA target? At Herskovits PLLC we are experienced securities lawyers focused exclusively on representing industry firms and professionals with FINRA or SEC challenges and advising on compliance matters. Call US at 212.897.5410 or Connect Online