An irreverent Wall Street Blog
FINRA and Citigroup Global Markets Not SHO Enough
December 20, 2022
FINRA the self-regulatory-organization apparently examined Citigroup Global Markets Inc. the FINRA Large Member firm during 2008 through 2022 because the regulator cited the firm's Reg SHO aggregation misconduct in three AWC settlements. Notably, the fines increased in each ensuing AWC. At some point, FINRA has to have an epiphany, however, that simply ratcheting up each ensuing fine on CGMI and other Large Member Firms doesn't accomplish anything. At best, the fines are an inconvenience for the violators. At worst, they are of no consequence. When it comes to Small Member Firms and the industry's hundreds of thousands of associated persons, FINRA selects sanctions seemingly designed to inflict pain. For the industry's big boys, well, y'know, it's more in the fashion of charging a modest toll on Wall Street.
2022 FINRA CGMI AWC
For the purpose of proposing a settlement of rule
violations alleged by the Financial Industry Regulatory Authority
("FINRA"), without admitting or denying the findings, prior to a
regulatory hearing, and without an adjudication of any issue, Citigroup Global
Markets Inc. ("CGMI") submitted a Letter of Acceptance, Waiver and
Consent ("AWC"), which FINRA accepted. The 2022 FINRA CGMI
AWC asserts that CGMI has been a FINRA member firm since
1936 with about 8,000 registered representatives at 700
branches.
In the Matter of Citigroup Global Markets Inc.,
Respondent (FINRA AWC 2018057494001) (the ("2022
FINRA CGMI AWC")
https://www.finra.org/sites/default/files/fda_documents/2018057494001
%20Citigroup%20Global%20Markets%20Inc.%20CRD%20%207059%20AWC%20gg.pdf
%20Citigroup%20Global%20Markets%20Inc.%20CRD%20%207059%20AWC%20gg.pdf
2014 to 2022: Reg SHO Aggregation
Violations
As briefly summarized in the
"Overview" portion of the 2022 FINRA CGMI AWC:
Since at least January 1, 2014 through the present, the firm violated Rule 200(f) of Regulation SHO and FINRA Rule 2010 by improperly including securities positions of non-broker-dealer affiliates in two of its aggregation units when calculating the net positions of the aggregation units. The film also failed to establish, maintain, and enforce, a supervisory system reasonably designed to achieve compliance with Rule 200(t), in violation of FINRA Rules 3110 and 2010.
That whole "2014 through the present" is just a
tad too slick for me. Let me set it out in a more illustrative
manner:
- 2014,
- 2015,
- 2016,
- 2017,
- 2018,
- 2019,
- 2020,
- 2021, and
- the twelve months ending in December 2022
If you don't mind, let's just call it nine years of
improper aggregation by CGMI. In summary, FINRA alleged that from 2014
to the present, CGMI improperly included non-broker-dealer affiliates in the
calculation of its net positions in violation of Regulation SHO and FINRA Rule
2010.
SIDE BAR: § 242.200 Definition of "short sale" and marking requirements.
. . .
(f) In order to determine its net position, a broker or dealer shall aggregate all of its positions in a security unless it qualifies for independent trading unit aggregation, in which case each independent trading unit shall aggregate all of its positions in a security to determine its net position. Independent trading unit aggregation is available only if:(1) The broker or dealer has a written plan of organization that identifies each aggregation unit, specifies its trading objective(s), and supports its independent identity;(2) Each aggregation unit within the firm determines, at the time of each sale, its net position for every security that it trades;(3) All traders in an aggregation unit pursue only the particular trading objective(s) or strategy(s) of that aggregation unit and do not coordinate that strategy with any other aggregation unit; and(4) Individual traders are assigned to only one aggregation unit at any time.
2022 AWC
Sanctions
In accordance with the terms of the 2022
FINRA CGMI AWC, FINRA imposed upon CGMI a Censure, $1,500,000 fine,
and an undertaking to certify compliance with the supervisory issues
cited.
2018 FINRA CGMI AWC
Okay, sure, a $1.5 million fine seems like a big deal --
and perhaps for one of FINRA's Small Member Firms with under 150 reps it would
be -- but for the likes of CGMI with 8,000 reps $1.5 million is chump change. Which is why am I making such a big deal about the nine-year continuum of
misconduct in the 2022 FINRA CGMI AWC. Pointedly, consider
this disclosure in the 2022 FINRA CGMI AWC [Ed:
footnote omitted]:
On February 9, 2018, FINRA accepted an AWC in which the firm was censured and fined $450,000 for failing to include two firm trading accounts in any independent trading unit in violation of Rule 200(f) of Regulation SHO, and for failing to have a reasonably designed supervisory system, including written supervisory procedures, to ensure that all firm accounts conducting firm business were included in an independent trading unit, in violation of NASD Rules 3010 and 2110 and FINRA Rule 2010.
Hmmm . . . so the 2022 AWC discloses FINRA had previously entered into 2018 AWC with CGMI involving an improper aggregation issue under Reg
SHO. Being the inquisitive fellow that I am, I located
that 2018 AWC:
In the
Matter of Citigroup Global Markets Inc., Respondent (FINRA AWC 2014041142501/
February 9, 2018) (the "2018 FINRA CGMI AWC")
https://www.finra.org/sites/default/files/fda_documents/2014041142501
%20Citigroup%20Global%20Markets%20Inc.%20BD%207059%20AWC%20jm%20%282019-1563351561753%29.pdf
%20Citigroup%20Global%20Markets%20Inc.%20BD%207059%20AWC%20jm%20%282019-1563351561753%29.pdf
For the purpose of proposing a settlement of rule
violations alleged by the Financial Industry Regulatory Authority
("FINRA"), without admitting or denying the findings, prior to a
regulatory hearing, and without an adjudication of any issue, CGMI submitted a
Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA
accepted. As set forth in the "Summary" portion of the 2018
FINRA CGMI AWC:
The Short Sales Section of the Department of Market Regulation (the "staff') reviewed the firm's compliance with SEC Rule 200(f) of Regulation SHO ("Rule 200(f)") during the period November 21, 2008 through December 3, 2013 (the "review period").
During the review period, the firm did not include two accounts (the "accounts") engaged in proprietary transactions in any independent trading aggregation unit in violation of Rule 200(f). Specifically, beginning on November 21, 2008, the firm started to use the accounts to facilitate certain broker-dealer client orders by placing them in a confidential, walled off "black box" and creating new "representative" orders in the accounts. The representative orders had new order identification numbers and they were routed to the marketplace with the terms, conditions, and order marking instructions of the original broker-dealer client orders. The firm failed to recognize that with respect to this broker-dealer order flow, the accounts were engaging in proprietary transactions that should have been included in an aggregation unit for purposes of calculating its net position. The failure to include these proprietary transactions in the net position calculations in any aggregation unit had an unquantified impact on the firm's overall Regulation SHO obligations, potentially including order marking, locate, and trade reporting obligations. In addition, the firm's supervisory system, including its written supervisory procedures, were not reasonably designed to ensure that all firm accounts conducting proprietary business were included in an aggregation unit.As set forth below, the above conduct constitutes violations of Rule 200(f), NASD Rules 3010 and 2110 (for conduct occurring prior to December 15, 2008), and NASD Rule 3010 and FINRA Rule 2010 (for conduct occurring on or after December 15, 2008).
2008 to 2013: Reg SHO Aggregation
Violations
Okay -- so, for the 2018 FINRA CGMI
AWC "review period" from November 2008 through
December 2013, CGMI violated Reg SHO when the firm "failed to recognize
that with respect to this broker-dealer order flow, the accounts were engaging
in proprietary transactions that should have been included in an aggregation
unit for purposes of calculating its net position." Again,, let's set out
the "review period" in a more illustrative manner:
- 2008,
- 2009,
- 2010,
- 2011,
- 2012, and
- the twelve months ending in December 2013
Let's just call it six years of improper aggregation by
CGMI.
2018 AWC
Sanctions
In accordance with the terms of the 2018
FINRA CGMI AWC, FINRA imposed upon Citigroup Global Markets Inc. a
Censure, $450,000 fine and an undertaking to certify compliance with the
supervisory issues cited.
2013 FINRA CGMI
AWC
Again,
you might ask why am I making such a big deal of the continuum of misconduct in the 2022 and the 2018 FINRA CGMI AWCs?
Another good question! Consider this disclosure in the 2018 FINRA
CGMI AWC [Ed: footnote omitted]:
On August 9, 2013, FINRA accepted an AWC in which the firm was censured and fined $22,500 for violations of Rule 200(g) of Regulation SHO under the Securities Exchange Act of 1934 ("Regulation SHO"), and Rule 203(b) of Regulation SHO, for violations in April 2009, June 2010, and August 2011.
A Troubling Consistency
Oh for godsakes! Seriously!! A THIRD Reg SHO AWC, and this one goes back to 2013???
Clearly, CGMI has a problem
complying with Reg SHO and the whole adding up the proper trades when it comes
to aggregating its position. You got six years of noncompliance here and nine
years of noncompliance there, and if we add that all up, well, we got something
like 15 years of not adding things up like you're supposed to. FINRA charged
CGMI for a run of noncompliance from 2008 through 2013; and, apparently
undeterred by the nuisance of FINRA's tepid sanctions, CGMI started another
string of noncompliance from 2013 through 2022. If nothing, CGMI is
consistent. And, sadly, FINRA is consistent too -- but not in a good
way.
In 2013, FINRA fined CGMI $22,500 for not being in compliance for three months in 2009, 2010, and 2011.
In 2018, FINRA fined CGMI $450,000 for not being in compliance from 2008
through 2013.
In 2022, FINRA fined CGMI $1.5 million for not being in compliance from 2014 to 2022.
$22,500 here and $450,000 there and another $1.5 million; and, none of the fines seems to have made that much of an impression on CGMI. Perhaps the member firm found it easier -- more convenient -- to just write out a check for whatever nuisance dollars a FINRA fine amounts to. It's sure as hell cheaper than beefing up the back office and spending whatever's necessary to get things under control. Making matters worse, FINRA is part of the equation and rather than comporting itself as a formidable industry regulator, FINRA has been reduced to little more than an annoying cost of doing business.
2015 - 2021: Aware But Failed
To Remediate
What troubles me and should trouble you is this
disquieting allegation in the 2022 FINRA CGMI AWC [Ed:
footnotes omitted]:
By late 2015, the firm became aware that the inclusion of non-broker-dealer affiliates was not permissible under Rule 200(f). Nonetheless, the firm did not begin the process of removing its non-broker dealer affiliates from the AGUs until 2021. As a result, the firm failed to take reasonable steps to timely act upon known Rule 200(f) deficiencies.
By late 2015, CGMI knew that it wasn't
aggregating according to the rules. Despite CGMI's knowledge that it wasn't calculating various aggregation components according to the rules, the firm essentially said
"screw it," or, in regulatory doublespeak that FINRA bestows upon the Too-Big-Too-Fail: "the firm failed to take reasonable steps to time act. . ." As the AWC alleges, despite knowing in 2015 that it was not complying with Rule 200(f), CGMI "did not begin the
process" of remediation until 2021. Six years of not beginning the
process? And the worst that FINRA can muster up is a indifferent allegation that
CGMI "failed to take reasonable steps to timely act?"
Bill Singer's Comment
Assuming that FINRA had routinely examined its member firm CGMI during the 2008 - 2022 misconduct cited in three AWCs, it appears that the self-regulatory-organization has invoked a kumbaya approach -- it is FINRA at its nostalgic worst. At some point, FINRA has to have an epiphany that simply ratcheting up each ensuing fine on CGMI and other Large Member Firms doesn't accomplish anything. At best, the fines are an inconvenience for the violators. At worst, they are of no consequence. When it comes to Small Member Firms and the industry's hundreds of thousands of associated persons, FINRA selects sanctions seemingly designed to inflict pain. For the industry's big boys, well, y'know, it's more in the fashion of charging a modest toll on Wall Street.