Citi agrees to pay $2.9m to SEC for recordkeeping failures

Rick Steves

Recordkeeping is a fundamental aspect of the federal securities laws, mandating broker-dealers to maintain accurate and current records, including ledgers reflecting assets and liabilities.

The Securities and Exchange Commission (SEC) has announced that it has reached a settlement through cease-and-desist proceedings with Citigroup Global Markets Inc. (CGMI), a broker-dealer, for its willful violation of recordkeeping requirements concerning expenses related to its underwriting business.

The settled agreement underscores the significance of accurate recordkeeping in maintaining the integrity of financial operations within the securities industry.

Broker-dealers required to maintain accurate and current records

Recordkeeping is a fundamental aspect of the federal securities laws, mandating broker-dealers to maintain accurate and current records, including ledgers reflecting assets and liabilities.

The SEC’s order reveals that CGMI, from 2009 to May 2019, utilized an unverified method to calculate and record indirect expenses linked to its role as an underwriter. CGMI employed a fixed percentage of the underwriting fee for each deal as a basis for calculating the indirect expense amount. This amount was then distributed across specific expense categories using predetermined “allocation grids.”

However, the SEC’s order unveils that CGMI lacked substantiation for this method and failed to verify its reasonability. Remarkably, the broker-dealer remained unaware of the basis of this calculation method for over a decade and did not perform any review process to ensure its accuracy.

SEC fines Citigroup $2.9 million

Sanjay Wadhwa, Deputy Director of the SEC’s Division of Enforcement, emphasized the pivotal role that underwriters play in securities offerings, acting as gatekeepers to safeguard investors and facilitate companies’ access to capital for growth and innovation. He underscored that recordkeeping failures of this nature, persisting for an extended period, could undermine these functions. The SEC remains steadfast in enforcing the federal securities laws’ books and records provisions, which are vital for the proper functioning of financial markets.

The SEC’s order charges CGMI with violating Section 17(a) of the Exchange Act and Rule 17a-3 thereunder, which pertain to recordkeeping requirements. As part of the settlement, CGMI consented to a cease-and-desist order, a censure, and a civil penalty amounting to $2.9 million. The agreement reflects the seriousness with which the SEC views adherence to recordkeeping regulations.

As a critical component of market integrity and investor protection, recordkeeping plays a crucial role in upholding the functions of broker-dealers and underwriters.

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