Citigroup fined by NASD for misleading mutual funds

Losses & Lawsuits

The National Association of Securities Dealers (NASD) has fined Citigroup $1.1 million for failing to prevent its brokers from submitting false information to mutual funds.

The regulator fined Citigroup Global Markets $400,000 for supervisory and record-keeping violations in a ploy by more than 100 of its brokers to improperly obtain waivers of mutual fund sales charges, by falsely claiming that their customers were disabled.

The firm was also ordered to pay $715, 000 in restitution to the affected mutual fund entities.

The misconduct was committed from June 2001 through June 2002. So far, NASD has taken disciplinary action against five Citigroup-registered representatives relating to this misconduct, as investigations into other Citigroup brokers continue.

Citigroup was ordered to review its policies, systems, procedures and training relating to Contingent Deferred Sales Charge (CDSC) waivers in mutual fund transactions.

NASD found that Citigroup's electronic order entry system provided an unsupervised method for its representatives to obtain CDSC waivers for customers.

Citigroup failed to develop any exception reports, or otherwise provide for reasonable steps to ensure registered representatives' compliance with the applicable prospectus terms.

While Citigroup issued a Compliance Memo in 1999 to its managers and directors advising that CDSC waivers could not be granted "except in circumstances specified in the fund prospectus", the firm failed to implement policies or procedures reasonably designed to ensure compliance with this directive.

For one year, Citigroup must also provide a quarterly certification to NASD that it has reviewed all CDSC disability waivers granted, has verified that they were appropriately granted (or corrected those waivers that were not appropriately granted), and has retained required supporting documentation.

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