The Securities & Exchange Commission today announced settled cease-&-desist proceedings against broker-dealer Citigroup Global Markets Inc. (CGMI) for willfully violating recordkeeping requirements concerning expenses that the firm incurred in connection with its underwriting business.
Recordkeeping requirements of the federal securities laws require broker-dealers to make & keep current certain books & records, including ledgers or other records reflecting all assets & liabilities. The SEC’s order finds that, from at least 2009 through May 2019, CGMI used an unsubstantiated & unverified method to calculate & record indirect expenses associated with its work as an underwriter. According to the SEC’s order, CGMI calculated an indirect expense amount based on a fixed percentage of the underwriting fee for each deal where it was engaged as a lead underwriter & then, using fixed “allocation grids,” divided that amount into specific categories of expenses. The order finds that, upon calculating these indirect expenses through this unsubstantiated method, CGMI recorded the amounts in its general ledger. According to the order, for at least a decade, CGMI did not know the basis of this indirect expense calculation method & conducted no review or similar process to verify that this method was reasonable.
“Underwriters serve a critical role as gatekeepers in securities offerings. They perform essential functions, including investor protection & also helping companies access capital to grow & innovate,” said Sanjay Wadhwa, Deputy Director of the SEC’s Division of Enforcement. “Recordkeeping failures such as these, perpetuated over at least a decade, can undermine the viability of those functions. The SEC will continue to vigorously enforce the books & records provisions of the federal securities laws, which are crucial to well-functioning markets.”
The SEC’s order charges CGMI with violating Section 17(a) of the Exchange Act & Rule 17a-3 thereunder. Without admitting or denying the SEC’s findings, CGMI consented to a cease-&-desist order, a censure, & a civil penalty of $2.9 million.
The SEC’s investigation was conducted by Chevon Walker, Mala Bartucci, & Lindsay Moilanen of the New York Regional Office, & the SEC Enforcement Division’s Market Abuse Unit, with assistance from the New York Regional Office Broker-Dealer & Exchange Examination Program. It was supervised by Joseph Sansone.