Citigroup (NYSE: C) has been fined $650,000 for disclosure and supervisory violations by the Financial Industry Regulatory Authority (FINRA) in the regulator’s first action involving a broker-dealer stock borrow program, according to a new WSJ Report.
The New York-based bank has suspended all new borrows through its Direct Borrow Program on November 30th, 2008 and has returned shares to customers who had lent shares through the program. Citi has so far neither or admitted or denied the charges made by FINRA.
FINRA, an industry-funded regulator of securities firms, said that Citigroup’s Direct Borrow Program borrowed fully paid hard-to-borrow securities owned by the firm’s customers starting in the beginning of 2005, going through November 30th, 2008 and placed them in a pool of securities used for the company’s clients’ short-selling strategies.
FINRA said that Citigroup had also failed to disclose necessary information to consumers about participating in the Direct Borrow program, such as that dividends could be subject to higher taxes. The regulator also said that Citigroup’s program operated without oversight procedures designed to supervise its staff and the firm’s brokers to adequately monitor the participant’s accounts in the program.
The Direct Borrow Program setup loans for more than 2,300 customers across 4,000 loans and 770 different securities. The average annual value of outstanding loans from customers totaled $301 million.
