FINRA Fines Citigroup $650,000 for Direct Borrow Program Deficiencies

First Action Involving a Stock Borrow Program Cites Disclosure and Supervisory
Failures
WASHINGTON--(Business Wire)--
In its first enforcement action involving a broker-dealer stock borrow program,
the Financial Industry Regulatory Authority (FINRA) announced today that it has
fined Citigroup Global Markets, Inc. $650,000 for disclosure and supervisory
violations relating to the operation of its Direct Borrow Program (DBP).

FINRA`s investigation 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
securities went into a pool of securities used, among other things, to
facilitate Citigroup`s clients` short-selling strategies. The DBP arranged for
more than 4,000 loans involving more than 770 different securities borrowed from
more than 2,300 customers. The average annual value of outstanding loans from
customers was approximately $301 million.

FINRA found that Citigroup failed to disclose, or to adequately disclose,
certain material information to customers participating in the DBP, including
that the securities were hard-to-borrow; that the interest rates could be
reduced by the firm; that the brokers received commissions for the duration of
the loan; that while the securities were on loan, dividends were paid as
"cash-in-lieu" of dividends and were therefore subject to higher tax rates; and,
that shares on loan could be sold by the customers at any time.

"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.

Branch managers and supervisors were not notified that customers of brokers they
supervised were participating in the DBP. FINRA found that many of the firm`s
branch managers and other supervisors were not even aware that the DBP existed.
In addition, the traditional tools that were available to branch managers and
other supervisors to monitor customer accounts were compromised when shares were
lent through the DBP. Because a customer`s account no longer reflected the
customer`s position in the security when the shares were lent through the DBP,
exception reports - such as concentration reports and account market value loss
reports - no longer captured the customer`s account even if it became overly
concentrated in the security or lost a significant amount of market value due to
the lent security`s loss in value. Therefore, the firm`s ability to supervise
values of positions, concentration levels, and on-going appropriateness of the
loan transaction for the customers was compromised.

FINRA also found that Citigroup distributed three versions of marketing
materials to the public regarding the DBP that were not fair and balanced and
did not provide a sound basis for evaluating the facts in regard to the DBP. The
marketing materials contained misleading statements that there was very little
risk associated with the DBP, that no customers suffered any losses and that the
firm tried to avoid interest rate changes as much as possible.

Citigroup suspended all new borrows through the DBP on Nov. 30, 2008 and, as of
the date of the settlement, had returned all shares to customers who had lent
through the DBP.

In concluding this settlement, Citigroup neither admitted nor denied the
charges, but consented to the entry of FINRA's findings.

Investors can obtain more information about, and the disciplinary record of, any
FINRA-registered broker or brokerage firm by using FINRA's BrokerCheck. FINRA
makes BrokerCheck available at no charge. In 2009, members of the public used
this service to conduct 18.5 million reviews of broker or firm records.
Investors can access BrokerCheck at www.finra.org/brokercheck or by calling
(800) 289-9999.

FINRA is the largest non-governmental regulator for all securities firms doing
business in the United States. FINRA is dedicated to investor protection and
market integrity through effective and efficient regulation and complementary
compliance and technology-based services. FINRA touches virtually every aspect
of the securities business - from registering and educating industry
participants to examining securities firms; writing rules; enforcing those rules
and the federal securities laws; informing and educating the investing public;
providing trade reporting and other industry utilities; and administering the
largest dispute resolution forum for investors and registered firms.

For more information, please visit our Web site at www.finra.org.

Financial Industry Regulatory Authority (FINRA)
Nancy Condon, 202-728-8379
or
Herb Perone, 202-728-8464

Copyright Business Wire 2010