WASHINGTON – Citigroup Global Markets, Inc. agreed to pay a $250,000 fine after the Financial Industry Regulatory Authority found rule violations including the failure to report accurate interest rate reset information for 251,507 variable rate demand obligation securities.
In a separate case, Livingston, N.J.-based The GMS Group settled with FINRA for selling municipal bonds to retail customers in amounts below the minimum denominations set by the issuers and, in some instances, failing to disclose that fact to the customers. GMS agreed to pay $45,000 to settle the Municipal Securities Rulemaking Board rule violations.
Both New York-based Citigroup and GMS agreed to their settlements without admitting or denying FINRA's findings. Representatives for the firms declined to comment on the settlements.
FINRA's findings against Citigroup came from a review of the firm's compliance with the MSRB Short-Term Obligation Rate Transparency (SHORT) System reporting requirements. The review found systematic issues that had impacted the firm's MSRB SHORT interest rate reporting for weekly-reset variable rate demand obligation securities from April 1, 2009 through July 17, 2014. The issues led the firm to report the rate resets to SHORT on the date that the reset became effective instead of the date the rate was determined.
Those reporting failures meant Citigroup violated MSRB Rule G-34 on CUSIP numbers, new issue, and market information requirements because it did not submit the reset information for the 251,507 VRDOs during the time period required under the rule.
The firm also violated Rule G-34 by not submitting information to the SHORT system about the results of 801 interest rate resets for VRDO securities, according to FINRA. Additionally, the firm's supervisory procedures were not set up to ensure accuracy in the rate reset reporting, FINRA said.
The supervisory system did not have procedures to: identify those with supervision responsibility with respect to the applicable rules; indicate the steps each person needed to take; explain how often those people should have taken the steps; and direct those people on how the completed steps should be documented. The failures were violations of MSRB Rule G-27 on supervision, FINRA said.
FINRA also found that Citigroup separately failed to report 97 transactions in agency debt securities to FINRA's TRACE system within the required amount of time under FINRA rules. The TRACE violations occurred from Jan. 1, 2015 through March 31, 2015.
The $250,000 fine includes $175,000 for the G-34 violations, $65,000 for the G-27 violation, and $10,000 for the violations related to TRACE reporting of corporate debt.
The GMS missteps FINRA found took place between January 2014 and March 2015. GMS recommended and sold 23 munis to retail customers in transactions below the minimum denominations during that time period. On three occasions, the firm also failed to disclose that the transactions were in amounts below the designated minimum for the bonds.
FINRA also found that GMS recommended and sold four bonds in roughly 200 transactions during the time period to customers who were not qualified institutional buyers (QIBs) even though the statements for the bonds said they were only eligible for sale to QIBs. QIBs are considered sophisticated investors and individuals cannot qualify for the designation.
GMS' actions represented violations of MSRB Rules G-15 on confirmation, G-17 on fair dealing, G-19 on suitability, G-47 on time of trade disclosure, and G-27, FINRA found. The $45,000 fine is entirely related to the MSRB rule violations.