The Financial Industry Regulatory Authority is ordering Citigroup Global Markets Inc. (CGMI) to pay $11.5M in restitution and fines to resolve charges accusing the firm of displaying “inaccurate research ratings” on over 1800 stocks—that’s more than 38% of the stock that CGMI covers. According to the self-regulatory organization, the result of the inaccurate ratings was that a lot of customers ended up buying shares they wouldn’t have purchased otherwise if the right information had been provided.
Citigroup settled the case without denying or admitting to wrongdoing. The alleged inaccurate ratings would have been issued between 2011 and 2015.
According to the self-regulatory organization, CGMI showed the inaccurate ratings not just to retail customers, but also to its brokers and supervisors. These inaccuracies were caused by errors in the firm’s electronic ratings data feed that it provides to its clearing firm. As a result: the wrong rating was displayed for certain securities, ratings for securities that CGMI did not cover were provided, and/or the ratings for securities that the firm did rate were not displayed at all. The research ratings on CGMI’s actual research reports, to which brokers had access, were not impacted by these mistakes.
Equity research ratings are indicative of what a firm thinks of a public security’s future performance. CGMI provided its research ratings on customer account statements, through an online portal, and via email alerts. The firm’s supervisors and brokers depended on the research ratings that had been disseminated within the firm to oversee customer transactions, monitor portfolio allocations, or provide securities recommendations.
Unfortunately, because of the purported inaccuracies found in the ratings feed, brokers ended up soliciting thousands of transactions that did not match up with the correct research ratings. In certain instances, said FINRA, this caused them to make inaccurate statements to customers and solicit transactions that were in violation of portfolio guidelines.
FINRA said that CGMI made statements that were materially inaccurate, as well as made omissions, related to over 19,000 research ratings on the account statements of customers. The firm issued over 1,000 customer email alerts with research ratings that were not accurate. It also is accused of not correcting the inaccuracies in a timely enough manner even though there had been red flags indicating that there were issues.
CGMI, which cooperated with the FINRA probe, self-reported the research rating inaccuracies to the regulator and set up a plan to compensate customers that were harmed. The firm also settled allegations involving alleged supervisory violations.
As FINRA EVP and Enforcement head Susan Schroeder noted, displaying and utilizing inaccurate research ratings can have “adverse consequences.” Schroeder noted that it is the job of firms to quickly address such inaccuracies, even if technology was the case. Of the $11.5M that CGMI must pay, $5.5 is a fine and at least $6M is retail customer restitution.
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