Citigroup Global Markets (CGMI) has settled a US$2.9 million penalty with the US Securities and Exchange Commission (SEC) for underwriting expenses recordkeeping violations.
The SEC found that CGMI, between 2009 and 2019, used an “unsubstantiated and unverified” method to calculate and record indirect expenses associated with its work as an underwriter, in violation of federal securities laws requiring broker-dealers to maintain records reflecting all assets and liabilities.
Sanjay Wadhwa, deputy director of the SEC’s division of enforcement, said: “Underwriters serve a critical role as gatekeepers in securities offerings. They perform essential functions, including investor protection and also helping companies access capital to grow and innovate.
“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 and records provisions of the federal securities laws, which are crucial to well-functioning markets.”
According to the SEC, 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 and then, using fixed “allocation grids,” divided that amount into specific categories of expenses.
Upon calculating these indirect expenses through this unsubstantiated method, CGMI recorded the amounts in its general ledger. According to the SEC, for at least a decade, CGMI did not know the basis of this indirect expense calculation method and conducted no review or similar process to verify that this method was reasonable.
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