Finra fines Citi for B-D stock borrow agreement

In its first enforcement action involving a broker-dealer stock borrow program, the Financial Industry Regulatory Authority announced today that it fined Citigroup Global Markets, Inc. $650,000 for disclosure and supervisory violations relating to the operation of its Direct Borrow Program.

Finra’s probe found that between Jan. 1, 2005, and Nov. 30, 2008, Citigroup’s DBP borrowed fully paid hard-to-borrow securities owned by the firm’s customers, who were in large part retail customers. The borrowed shares went into a pool of securities used, among other things, to assist Citigroup’s clients’ short-selling strategies.

The securities industry regulator discovered that Citi failed to disclose — or to adequately disclose — certain material information to customers participating in the DBP, including that the securities were hard-to-borrow and the brokers received commissions for the duration of the loan.

“Before offering a product to customers, brokerage firms must reasonably ensure that the customers are aware of all of the potential risks associated with the transaction,” said James S. Shorris, Finra executive vice president and executive director of enforcement. “In this case, Citigroup failed to maintain a supervisory system that ensured that such disclosures were made to customers by the firm’s registered representatives and in the firm’s marketing materials.”

Finra found that the DBP operated without a system or procedures specifically designed to supervise the activities of the DBP staff and the firm’s brokers and to adequately monitor the accounts of customers who participated in the DBP.

“Citi takes matters of investor protection very seriously,” said Alexander Samuelson, a spokesman for Citi . “Accordingly, we cooperated fully with Finra’s investigation and are pleased to have settled this matter.”