Last week the Financial Industry Regulatory Authority (FINRA) announced that it had fined New York investment bank Citigroup Global Markets $5.5 mln and mandated the firm pay $6 mln in compensation to retail customers for displaying inaccurate research ratings for numerous securities over a five year period.
FINRA discovered that from February 2011 through December 2015, Citigroup Global Markets displayed inaccurate research ratings for more than 1,800 equity securities to its brokers, retail customers, and supervisors. The problem was caused by errors in the electronic feed of ratings data that Citigroup provided to its clearing firm. Consequently, Citigroup’s clearing firm displayed wrong ratings for some covered stocks, displayed ratings for other companies that Citigroup did not cover, or failed to display ratings for securities that Citigroup did rate. These mistakes were not evident in Citigroup’s actual research reports which were distributed to brokers and other customers.
According to FINRA, the inaccuracies in the research ratings feed had widespread, adverse consequences. As a result of the errors, Citigroup brokers solicited thousands of transactions inconsistent with the firm’s actual ratings and negligently made inaccurate statements to customers about those ratings. They also solicited transactions that violated certain firm-managed portfolio guidelines, which were based on Citigroup research ratings. For example, the portfolios were prohibited from containing equity securities the firm had rated “sell.” Because Citigroup brokers relied on inaccurately displayed ratings, many customers’ portfolios improperly included “sell”-rated securities. Citigroup supervisors, relying on those same inaccurate ratings, failed to detect and prevent a substantial number of transactions that were actually inconsistent with Citigroup research or portfolio guidelines. The firm also made materially inaccurate statements and omissions regarding more than 19,000 research ratings on customer account statements, sent more than 1,000 customer email alerts with inaccurate ratings, and displayed inaccurate ratings on online portals available to customers.
In addition, Citigroup failed to correct the inaccurately displayed ratings in a timely manner, despite numerous red flags alerting the firm to ratings inaccuracies for several securities. Citigroup also failed to conduct testing reasonably designed to verify the accuracy of research ratings data that it used and distributed.
Although Citigroup discovered the mistake and reported the issue to regulators, FINRA felt the problem was severe enough to warrant a hefty fine plus compensation. Clearly, this case was one where Citigroup made an unintentional error. However, FINRA pointed out that Citigroup failed to test their systems sufficiently to discover and rectify their mistake in a timely manner. FINRA also pointed out the numerous consequences the distribution of inaccurate ratings had on retail customers.
This case highlights the compliance risks that research providers face if they don’t conduct sufficient proactive testing of their research related technology systems.