The Securities and Exchange Commission has reached a $20 million settlement with broker/dealer CitiGroup Global Markets due to the firm failing to provide customers with adequate investment information and for not disclosing revenue-sharing agreements with mutual fund complexes.
The CitiGroup unit was additionally hit with a separate, $6.25 million penalty from the NASD. The NASD fine against the CitiGroup unit is part of a larger, $21 million action that also levies $13 million against American Express Financial Advisors and $2 million against Chase Investment Services for similar disclosure failures. The SEC and NASD carried out the investigation jointly.
The regulators would not disclose how they discovered the wrongdoing, although Elaine Greenberg, assistant district administrator at the SEC's Philadelphia office, said this is an area the regulator "has been taking a hard look at." Taken together, the various disclosure failures impacted 275,000 transactions and more than 50,000 households. The firms will make remediation to investors that were impacted.
The news came on the same day that the beleaguered Putnam Investments was hit with yet another enforcement action, this time a $40 million settlement against one of its broker's over disclosure failures.
The SEC's share of the investigation involves two distinct disclosure failures at the CitiGroup unit, which offered retail brokerage services under the Smith Barney trade name, officials detailed in a statement issued Wednesday.
For starters, according to the SEC, the CitiGroup unit failed to disclose to its customers information regarding its revenue-sharing program, known as the Tier program, where 75 mutual fund complexes made payments in return for preferred shelf space. The CitiGroup unit, SEC officials noted, sold only those funds of mutual fund complexes that participated in the program. Benefits included increased access to branch offices, greater agenda space at sales meetings and visibility in the broker's in-house publications and broadcasts.
The second disclosure failure relates to the CitiGroup unit's sales of Class B shares of mutual funds in amounts of $50,000 or more. SEC officials said that the broker recommended and sold the shares to certain customers who, depending on the investment and the holding period, could have obtained a better rate of return if they had purchased Class A shares instead. The customers would have qualified for breakpoints beginning at the $50,000 level. As a result of the Class B purchases, the CitiGroup unit also received greater commissions than it would have earned on Class A shares of the same funds. So, in short, financial consultants at the firm failed to inform customers that their returns could be negatively impacted by the 12b-1 fees inherent in the purchase of Class B shares, as well as the fact that breakpoints were available at the $50,000 mark.
According to Ari Gabinet, district administrator at the SEC's Philadelphia office, the CitiGroup unit, "like many in the securities industry, was recommending Class B shares to certain customers without explaining that, in many cases, they could have paid less and had the prospect of better returns had they purchased Class A shares instead.
"While firms are entitled to fair compensation for their services, this sales practice was particularly troublesome because the firm's excess financial rewards came at the customers' direct expense without a full and fair explanation," Gabinet said in a statement.
CitiGroup Global Markets consented to the action without admitting or denying the disclosure failures.
The NASD's portion of the investigation against the CitiGroup unit additionally involves recommendations the firm made on the sales of some Class C shares. The brokerage industry regulator slapped its fine on Chase Investment Services for recommendations it made to customers on the sale of Class B and Class C shares, while the American Express Financial Advisors fine involved recommendation made by advisors on the sales of Class B shares only. Again, the disclosure failures centered on the firms' failure to disclose breakpoint discounts and the 12b-1 fees that trail Class B and Class C share sales.
"In recommending mutual funds that offer different share classes, brokers must consider the costs for each class and the effect those costs will have on a customer's investment, and recommend the share class that is the most advantageous to the customer," said NASD Vice Chairman Mary Shapiro, in a statement.
The firms' remediation plans will generally cover investors who purchased $50,000 worth of Class B and Class C shares between Jan. 1, 2002, and March 22, 2005. Affected customers will be notified within about five months and reimbursement will takes upwards of nine months, NASD officials said.