SEC Charges Citigroup Global Markets Inc. with Recordkeeping Failures concerning Underwriting Expenses

The Securities and Exchange Commission has officially disclosed the resolution of cease-and-desist proceedings involving Citigroup Global Markets Inc. (CGMI), a prominent broker-dealer. The company has settled with the SEC over deliberate violations of recordkeeping obligations relating to expenses incurred in connection with its underwriting operations.

In accordance with federal securities laws, broker-dealers are obligated to establish and maintain accurate and up-to-date records, including ledgers or comparable documentation reflecting their financial assets and liabilities. The SEC’s investigation has determined that from at least 2009 through May 2019, CGMI utilized an unverified and unsupported method to compute and document indirect expenses linked to its role as an underwriter.

According to the findings outlined in the SEC’s order, CGMI’s approach involved calculating an indirect expense figure based on a fixed percentage of the underwriting fee associated with each deal where the firm acted as the lead underwriter. This calculated amount was then allocated to various expense categories using predetermined “allocation grids.” The SEC order further specifies that CGMI consistently recorded these indirect expenses within its general ledger through this unsubstantiated methodology. Over the span of a decade, the firm neither comprehended the foundation of this indirect expense calculation method nor undertook any form of review or validation to ascertain its reasonableness.

Sanjay Wadhwa, Deputy Director of the SEC’s Division of Enforcement, commented, “Underwriters play a critical role as gatekeepers in securities offerings. Their responsibilities encompass vital functions such as safeguarding investors and aiding companies in accessing capital for growth and innovation. Prolonged failures in recordkeeping, as exhibited over the course of at least ten years, can erode the effectiveness of these functions. The SEC remains resolute in enforcing the books and records provisions of federal securities laws, as these provisions are fundamental to maintaining well-operating markets.”

The SEC’s order charges CGMI with breaching Section 17(a) of the Exchange Act as well as Rule 17a-3 under the same Act. While not explicitly acknowledging or contesting the SEC’s findings, CGMI has agreed to a cease-and-desist order, a formal censure, and a financial penalty amounting to $2.9 million as part of the settlement.