Citi Fined by NASD for Hedge Fund Marketing
Citigroup has been hit with another fine, this time for improper marketing of hedge funds. The NASD fined Citigroup Global Markets $250,000 for sending out more than 100 pieces of sales literature between July 2002 and June 2003, which, among other things, improperly used hypothetical returns in charts, failed to include adequate risk disclosure and cited potential rates of return without underlying evidence for it.
Citigroup was censured and fined, but neither admitted nor denied the charges. A Citigroup spokeswoman said the firm “took immediate action in cooperating fully with the NASD to make sure all materials comply with current NASD guidance.”
Separately, the SEC voted 3-to-2 to force large hedge funds (defined as having more than $30 million) to register with the SEC and to submit to regular inspections. The rule isn’t effective until February 2006.
Some of Citigroup’s sales brochures, according to the NASD, presented hypothetical performance for certain funds of funds—showing results for the funds before they had begun operating. The brochures were only sent to qualified investors, according to a source familiar with the situation. But many of the other pieces of sales information did not include adequate risk disclosure, the NASD said.
Hedge funds and fund of funds have increased in popularity amongst retail investors and, as such, regulators have become increasingly concerned about full disclosure of the risks associated with hedge funds. In February of last year, the NASD warned broker/dealers about the suitability of such investments, particularly in the case of fund of funds, which, in their eyes, “pose many of the same risks” as individual hedge funds.
“Ensuring that investors receive full and accurate information is critical” as sales of hedge funds and fund of funds to retail investors increase, said Mary Schapiro, NASD vice chairman in charge of enforcement, in a statement. The fine is the largest to-date by the NASD related to hedge funds.
According to Tass Research, a subsidiary of Tremont Capital Management, there was $43 billion in net flows to hedge funds in the second quarter; the overall size of the industry is estimated at $870 billion. A May study by financial consulting firm Greenwich Associates reveals that almost one-third of hedge funds have increased their use of leverage over the past 12 months. As a result, the SEC in July proposed that certain hedge funds—those with at least $30 million in assets—complete some form of registration with the SEC.
Citigroup has raised the ire of the NASD before, having been fined in July for two separate incidents, one related to corporate high-yield bond trade violations, the other for failing to comply with discovery requests in arbitration cases. And the firm is also reeling from the impending closure of its private banking unit in Japan, after Japanese regulators took action against the firm in a money-laundering scandal.
