The National Association of Securities Dealers sent a strong signal to the brokerage industry this week when it fined Citicorp Securities Inc. for not complying with beefed-up education requirements for brokers.
"This will get everybody's attention," said Mahlon Frankhauser, a partner at Kirkpatrick & Lockhart, a Washington, D.C., law firm. "It's a new program, and the NASD wants to show the world how seriously they take it."
The Citicorp subsidiary drew what some lawyers described as heavy punishment for being the first brokerage cited by the NASD as not complying with continuing-education rules adopted last year.
The NASD fined Citicorp Securities $25,000 and ordered it to pay an additional $300,000 for allowing 19 investment bankers in its corporate banking division to continue working, though they had not completed continuing education requirements.
Citicorp's blunder brings to light a new "administrative hazard" for banks expanding into brokerage, said Barbara Worthen, general counsel at Fleet Financial Group in Boston.
"These things are always a wake-up call, and it gives compliance lawyers a little red flag with respect to their requirements," she said.
Under the NASD rules, brokerages were required to set up continuing education programs by last January. Brokers must complete a computer-based training program on regulatory matters administered by a private company on behalf of the NASD.
In addition, brokerages must set up training courses to update their brokers on regulations and how new products work.
The fine against Citicorp Securities exceeded guidelines published by the NASD. For violating the education requirements, the suggested penalty ranges from $1,000 to $10,000 against a firm, plus $500 to $5,000 to represent the compensation earned by offending brokers while their registrations are inactive.
In Citicorp's case, the NASD asked the banking company to return the offending brokers' actual compensation. The penalty was considered especially harsh since the NASD cannot show how Citicorp's violation harmed specific customers, lawyers said.
Still, lawyers pointed out that brokerages don't have much excuse for not satisfying the requirements.
The NASD "gave the brokerage firms significant advance notice, so they were well aware of the need to implement the program and monitor their employees," said Joe Shaull, a partner in the Venable Law Firm in Washington.
An NASD spokesman said Citicorp got caught during a routine examination of the bank's securities unit, which the agency does for all member firms.
Citicorp blamed the infraction on an "administrative oversight" and said the individual investment bankers were not at fault. The bank's securities unit failed to "notify those individuals that it was their time for the test to be taken," a spokeswoman said.
The $267 billion-asset banking company issued a statement saying the 19 employees had not completed the required computer-based training program. To keep their licenses active, registered representatives must take the course on their second, fifth, and 10th anniversaries.
The Citicorp bankers' registrations were deemed inactive between November 1995 and May 1996. Citicorp said the employees have completed their training and their registrations are now current.
Citicorp said it has acted to prevent a recurrence by installing a tracking system to identify registered representatives who are approaching their time for required training.
The banking company also said it improved its notification process to alert investment representatives and their supervisors of their continuing education obligations, according to the statement.