The Financial Industry Regulatory Authority has fined Citigroup Inc. $650,000 for disclosure and supervisory violations in the authority's first enforcement action involving a broker-dealer stock-borrow program.
The industry-funded regulator of securities firms said Citi's Direct Borrow Program borrowed fully paid hard-to-borrow securities owned by the firm's customers between Jan. 1, 2005, and Nov. 30, 2008, and put them in a pool of securities used for the bank's clients' short-selling strategies.
Finra also said Citi failed to disclose information to customers participating in the program, including that dividends could be subject to higher tax rates, and that the program operated without procedures designed to supervise its staff and the firm's brokers and to adequately monitor the accounts of customers.
The program arranged for more than 4,000 loans of more than 770 different securities borrowed from more than 2,300 customers. The average annual value of outstanding loans from customers was $301 million.
Citi suspended all new borrows through its program on Nov. 30, 2008, and had returned all shares to customers who had lent through the program.
