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CONSENT ORDER No. CO-15-8239-S |
I. PRELIMINARY STATEMENT
WHEREAS, the Banking Commissioner (“Commissioner”) is charged with the administration of Chapter 672a of the General Statutes of Connecticut, the Connecticut Uniform Securities Act (“Act”), and Sections 36b-31-2 to 36b-31-33, inclusive, of the Regulations of Connecticut State Agencies promulgated under the Act (“Regulations”);
WHEREAS, Citigroup Global Markets Inc. (“CGMI”) is a broker-dealer registered in the State of Connecticut;
WHEREAS, state securities regulators have conducted coordinated investigations into the registration status of CGMI sales assistants and of CGMI’s supervisory system as it relates to such registration, such investigative authority in Connecticut being derived from Sections 36b-26(a) and 36b-31(c) of the Act;
WHEREAS, CGMI has cooperated with regulators conducting the investigations by responding to inquiries, providing documentary evidence and other materials, and providing regulators with access to facts relating to the investigations;
WHEREAS, CGMI has advised regulators of its agreement to resolve the investigations pursuant to the terms specified in this Consent Order;
WHEREAS, CGMI has made certain changes to relevant order entry systems and to CGMI’s supervisory system as it relates to such order entry systems;
WHEREAS, Section 36b-31(a) of the Act provides, in relevant part, that “[t]he commissioner may from time to time make . . . such . . . orders as are necessary to carry out the provisions of sections 36b-2 to 36b-34, inclusive”;
WHEREAS, Section 36b-31(b) of the Act provides, in relevant part, that “[n]o . . . order may be made . . . unless the commissioner finds that the action is necessary or appropriate in the public interest or for the protection of investors and consistent with the purposes fairly intended by the policy and provisions of sections 36b-2 to 36b-34, inclusive”;
WHEREAS, an administrative proceeding initiated under Section 36b-15 of the Act and Section 36b-27 of the Act would constitute a “contested case” within the meaning of Section 4-166(4) of the General Statutes of Connecticut;
WHEREAS, Section 4-177(c) of the General Statutes of Connecticut and Section 36a-1-55(a) of the Regulations of Connecticut State Agencies provide that a contested case may be resolved by consent order, unless precluded by law;
II. CONSENT TO WAIVER OF PROCEDURAL RIGHTS
WHEREAS, CGMI, through its execution of this Consent Order, voluntarily waives the following rights with respect to this Consent Order:
| 1. | To be afforded notice and an opportunity for a hearing within the meaning of Section 36b-15(f) and Section 36b-27(d)(2) of the Act and Section 4-177(a) of the General Statutes of Connecticut; |
| 2. | To present evidence and argument and to otherwise avail itself of Section 36b-15(f) and Section 36b-27(d)(2) of the Act and Section 4-177c(a) of the General Statutes of Connecticut; |
| 3. | To present its position in a hearing in which it is represented by counsel; |
| 4. | To have a written record of the hearing made and a written decision issued by a hearing officer; and |
| 5. | To seek judicial review of, or otherwise challenge or contest the matters described herein, including the validity of this Consent Order; |
NOW THEREFORE, the Commissioner, as administrator of the Act and of the Regulations, hereby enters this Consent Order.
III. JURISDICTION AND CONSENT TO ENTRY OF CONSENT ORDER
| 1. | CGMI admits the jurisdiction of the Commissioner in this matter. |
| 2. | Solely for the purpose of terminating the multi-state investigations, and in settlement of the issues contained in this Consent Order, CGMI, without admitting or denying the findings of fact or conclusions of law contained in this Consent Order, consents to the entry of this Consent Order by the Commissioner. |
IV. FINDINGS OF FACT
Relevant CGMI Business Units
| 1. | CGMI is a registered broker-dealer and wholly-owned subsidiary of Citigroup Inc. Prior to June 1, 2009, CGMI primarily operated its U.S.-based retail brokerage business through a business unit under the name Smith Barney. CGMI also operated, and continues to operate, other businesses, including a retail brokerage currently operated under the name Citi Personal Wealth Management. | |||||||||||||||||
| 2. | On June 1, 2009, Citigroup Inc. sold a majority stake in its primary retail brokerage business to a third party broker-dealer (the “Third Party Broker-dealer”). | |||||||||||||||||
| 3. |
After the June 1, 2009 transaction, Citigroup Inc. retained control and ownership of the CGMI businesses that had not been sold to the Third Party Broker-dealer. | |||||||||||||||||
| 4. | The multi-state investigations covered the period from January 1, 2007 through September 30, 2014 (the “Relevant Period”). The factual representations that follow relate to all or some portion of the Relevant Period. | |||||||||||||||||
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Background on CGMI Personnel | ||||||||||||||||||
| 5. | CGMI’s primary customer-facing retail broker-dealer agents were known as Financial Advisors (“FAs”). | |||||||||||||||||
| 6. | CGMI also employed sales assistants (“SAs”) using various job titles. Sales assistants were generally tasked with assisting FAs and customers with administrative and operational support. Sales assistants were involved in such tasks as:
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| 7. | Some sales assistants (hereafter, “RSAs”) were registered with CGMI. On occasion, RSAs could accept unsolicited orders from clients. Accordingly, RSAs were required to pass the Series 7 and 63 and/or 66 qualification exams and to register in the appropriate jurisdictions. | |||||||||||||||||
| 8. | During the Relevant Period, a policy relevant to this Consent Order stated, “Registered Sales Assistants need to be registered in every state that the FA(s) for whom they provide coverage is registered.” | |||||||||||||||||
| 9. | During a portion of the Relevant Period (see paragraph 11, below), CGMI personnel used a computerized order entry system known as “NextGen” to enter orders on behalf of customers. | |||||||||||||||||
| 10. | The NextGen order entry process was intended to generally work as follows. NextGen automatically populated the order-entry screen with the logon ID of the person entering the order, the name of that person, and the date and time the order was entered. The person entering the order verified that he or she was the person who received the order at the time the order was entered by checking the box stating, “Check to confirm client receipt information.” If the person entering the order was not the person who received the order, then the person entering the order entered the NextGen logon ID for the person who received the order into the “Received by ID/Name Box.” The person entering the order was prompted to provide his or her password. At that point, a variety of validations were conducted, including a check to ensure that the FA of record for the account was duly registered in the applicable state(s). However, NextGen did not check to ensure that the person accepting the client order, if different from the FA assigned to the account, was registered in the applicable state(s). Once the validation checks were completed, the order was either blocked or moved forward to the verification screen. If a trade was blocked due to a registration gap, an error message appeared on the NextGen screen stating, “FC REGISTRATION VIOLATION-CALL YOUR REG REPRESENTATIVE.” If the trade was not blocked, the person entering the trade was prompted to verify and submit the order. Upon submission, the order entry process was complete, and the order was sent to the market for execution. | |||||||||||||||||
| 11. | CGMI ceased using NextGen, and implemented a new order entry system during the fourth quarter of 2010 and the first quarter of 2011, as part of a conversion to a new clearing firm relationship with Pershing. | |||||||||||||||||
| 12. | As of January 1, 2009, CGMI employed approximately 3,500 RSAs on a nationwide basis. In connection with the Third Party Broker-dealer transaction described in paragraph 2 above, the retail brokerage business sales force at CGMI was reduced by approximately 95 percent. The vast majority of the RSAs were contributed to the Third Party Broker-dealer transaction. As of the date of this Consent Order, CGMI currently employs fewer than 100 RSAs nationwide. | |||||||||||||||||
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Regulatory Investigations and Findings | ||||||||||||||||||
| 13. | State securities regulators have initiated investigations into the practices of CGMI and other firms in connection with SA registrations. | |||||||||||||||||
| 14. | The multi-state investigations focused on whether SAs were properly registered in the relevant jurisdictions at the time such individuals may have accepted customer orders from those states. In addition, the investigations focused on whether the firms’ supervisory systems properly supervised such orders. | |||||||||||||||||
| 15. | In CGMI’s case, the investigations found that, in certain instances, SAs accepted unsolicited orders from clients residing in states where the SA was not registered. In addition, the investigations found that NextGen did not record the identity of the person receiving the order from the customer for a discreet set of orders that were reviewed. | |||||||||||||||||
| 16. | Furthermore, the investigations determined that (a) contrary to applicable policies and procedures, RSAs were not registered in every state that the FAs for whom they provided coverage were registered, and (b) as a result, it is highly likely that certain RSAs accepted unsolicited orders in Connecticut at times when the RSAs were not appropriately registered in Connecticut. | |||||||||||||||||
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Remedial Efforts | ||||||||||||||||||
| 17. | As part of a transition that was finalized in early 2011, CGMI’s retail business ceased using the NextGen system and started to use in its place an order entry system licensed and operated by Pershing called NetX360. | |||||||||||||||||
| 18. | Orders entered into NetX360 are routed through Pershing’s Rules Engine, which has certain checks relating to state registration status, including the registration status of the acceptor. | |||||||||||||||||
| 19. | In addition, quarterly review meetings in which RSAs are involved include a review of the firm’s state registration policy and the prohibition against accepting orders in states in which the RSA is not registered. | |||||||||||||||||
| 20. | CGMI provided timely responses and substantial cooperation in connection with the regulatory investigations into this issue. |
[V.] CONCLUSIONS OF LAW
| 1. |
The Commissioner has jurisdiction over this matter pursuant to the Act. |
| 2. |
CGMI’s failure to establish an adequate system to monitor the registration status of persons accepting client orders constitutes a violation of Section 36b-31-6f(b) of the Regulations under the Act which requires each registered broker-dealer to establish, enforce and maintain a system for supervising the activities of its agents that is reasonably designed to achieve compliance with applicable securities laws and regulations. |
| 3. | CGMI’s failure to ensure that its Sales Assistants were registered in the appropriate jurisdictions constitutes a failure to enforce its established written procedures, and therefore contravened Section 36b-31-6f(b) of the Regulations. |
| 4. | CGMI’s acceptance of orders in Connecticut through SAs who were not properly registered in Connecticut constitutes a violation of Section 36b-6(b) of the Act relating to the use of unregistered agents in the state. |
| 5. | Pursuant to Section 36b-27(d)(2) of the Act, the violations described above constitute bases for the assessment of an administrative fine against CGMI. |
| 6. | Pursuant to Section 36b-15 of the Act, a broker-dealer may be sanctioned for selling securities in Connecticut through agents other than agents registered in the state. |
| 7. | The Commissioner finds the relief set forth in Section VII of this Consent Order appropriate and in the public interest. |
VI. UNDERTAKINGS
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CGMI hereby undertakes and agrees to establish and maintain policies, procedures and systems that reasonably supervise the trade process so that a sales assistant can only accept client orders that originate from jurisdictions where the sales assistant accepting the order is appropriate registered. |
VII. CONSENT ORDER
On the basis of the Findings of Fact, Conclusions of Law, and CGMI’s consent to the entry of this Consent Order,
IT IS HEREBY ORDERED THAT:
| 1. |
This Consent Order concludes the investigation by the Commissioner and any other action that the Commissioner could commence against CGMI under the Act and the Regulations as it relates to (a) RSAs who, as described herein, accepted client orders while not registered in the appropriate jurisdiction, and (b) CGMI’s supervisory system relating to the state registration of RSAs during the period from January 1, 2007 through September 30, 2014. |
| 2. |
This Consent Order is entered into solely for the purpose of resolving the referenced multi- state investigation, and is not intended to be used for any other purpose. For any person or entity not a party to this Consent Order, this Consent Order does not limit or create any private rights or remedies against CGMI, limit or create liability of CGMI, or limit or create defenses of CGMI to any claims. |
| 3. |
Within ten (10) days after the entry of this Consent Order by the Commissioner, CGMI shall remit by bank check payable to “Treasurer, State of Connecticut” the total sum of Thirty Five Thousand Dollars ($35,000) as an administrative fine. |
| 4. |
CGMI is hereby ordered to comply with the Undertakings contained herein. |
| 5. |
This Consent Order is not intended by the Commissioner to subject any Covered Person (as defined below) to any disqualifications under the laws of the United States, any state, the District of Columbia, Puerto Rico, or the U.S. Virgin Islands, including, without limitation, any disqualification from relying upon state or federal registration exemptions or safe harbor provisions. “Covered Person” means CGMI or any of its affiliates and their current or former officers or former officers, directors, employees, or other persons that would otherwise be disqualified as a result of the Orders (as defined below). |
| 6. |
This Consent Order and the order of any other State in any proceeding related to CGMI’s agreement to resolve the above referenced multi-state investigation (collectively, the “Orders”) shall not disqualify any Covered Person, as defined in paragraph 5. above, from any business that they otherwise are qualified, licensed or permitted to perform under applicable securities laws of Connecticut and any disqualifications from relying upon this state’s registration exemptions or safe harbor provisions that arise from the Orders are hereby waived. |
| 7. | This Consent Order shall be binding upon CGMI and its successors and assigns as well as the successors and assigns of relevant affiliates with respect to all conduct subject to the provisions above and all future obligations, responsibilities, undertakings, commitments, limitations, restrictions, events, and conditions. |
NOW THEREFORE, the Commissioner enters the following:
| 1. | The Findings of Fact, Conclusions of Law and Consent Order set forth above, be and are hereby entered; |
| 2. | Entry of this Consent Order by the Commissioner is without prejudice to the right of the Commissioner to take enforcement action against CGMI based upon a violation of this Consent Order or based upon the matters underlying its entry, if the Commissioner determines that compliance with the terms herein is not being observed; and |
| 3. | This Consent Order shall become final when entered. |
| So ordered at Hartford, Connecticut, | ____/s/____________ | |
| this 8th day of October 2015. | Jorge L. Perez | |
| Banking Commissioner |
CONSENT TO ENTRY OF ORDER
I, Joshua E. Levine, state on behalf of Citigroup Global Markets Inc., that I have read the foregoing Consent Order; that I know and fully understand its contents; that I am authorized to execute this Consent Order on behalf of Citigroup Global Markets Inc.; that Citigroup Global Markets Inc. agrees freely and without threat or coercion of any kind to comply with the terms and conditions stated herein; and that Citigroup Global Markets Inc. voluntarily consents to the entry of this Consent Order, expressly waiving any right to a hearing on the matters described herein. Citigroup Global Markets Inc. further agrees that it shall not claim, assert, or apply for a tax deduction or tax credit with regard to any state, federal or local tax for any administrative monetary penalty that Citigroup Global Markets Inc. is obligated to pay pursuant to the foregoing Consent Order.
| Citigroup Global Markets Inc. | |
| By | _____ /s/_______________ |
| Joshua E. Levine | |
| Managing Director |
On this 6 day of October 2015, personally appeared Joshua E. Levine, signer of the foregoing Consent Order, who, being duly sworn, did acknowledge to me that he was authorized to execute the same on behalf of Citigroup Global Markets Inc., a corporation, and acknowledged the same to be his free act and deed, before me.
____/s/_________________________
Notary Public
My Commission Expires: June 18, 2019
Administrative Orders and Settlements