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Citigroup Global Markets Inc. Fined $1.25 Million for Failing to Appropriately Fingerprint or Sc Citigroup Global Markets Inc. Fined $1.25 Million for Failing to Appropriately Fingerprint or Sc

Citigroup Global Markets Inc. Fined $1.25 Million for Failing to Appropriately Fingerprint or Screen Employees Over Seven-Year Period

The Financial Industry Regulatory Authority ("FINRA") announced on Monday, July 29, 2019 that it had fined Citigroup Global Markets Inc. ("CGMI") $1.25 million for "failing to conduct timely or adequate background checks on approximately 10,400 non-registered associated persons spanning a seven-year period."

Section 17(f)(2) of the Securities Exchange Act of 1934 (the "34 Act") requires every broker-dealer to fingerprint certain employees prior to or upon those employees associating with the broker-dealer. Section 17(f)(2) requires that a broker-dealer must fingerprint every partner, director, officer, or employee save for a few limited exceptions. Those exceptions are:

  1. if a partner, director, officer, or employee is not engaged in the sale of securities;
  2. if that partner, director, officer, or employee does not have access to the keeping, handling, or processing of securities, monies, or the original books and records relating to the securities or monies; and
  3. if that partner, director, officer, or employee does not have supervisory responsibility over anyone required to be fingerprinted.

The fingerprint results are intended to provide insight into a prospective employee's criminal background. Section 3(a)(39) of the 34 Act provides a list of circumstances, actions, and criminal conduct that would lead to the automatic statutory disqualification of a prospective employee from a broker-dealer. The list of events leading to statutory disqualification under the 34 Act is as follows:

  1. certain misdemeanor and all felony criminal convictions for a period of ten years from the date of conviction.
  2. temporary and permanent injunctions (regardless of their age) issued by a court of competent jurisdiction involving a broad range of unlawful investment activities.
  3. expulsions or bars (and current suspensions) from membership or participation in a self-regulatory organization ("SRO"). Includes bars with a right to re-apply.
  4. bars (and current suspensions) ordered by the Securities and Exchange Commission ("SEC"), Commodity Futures Trading Commission ("CFTC"), or other appropriate regulatory agency or authority. Includes bars with a right to re-apply.
  5. denials or revocations of registration by the SEC, CFTC, or other appropriate regulatory agency or authority.
  6. findings that a member or person has made certain false statements in applications or reports made to, or in proceedings before, SROs, the SEC, or other appropriate regulatory agency or authority.
  7. any final order of a state securities commission (or any agency or officer performing like functions); state authority that supervises or examines banks, savings associations, or credit unions; state insurance commission (or any agency or office performing like functions); an appropriate Federal banking agency (as defined in Section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813(q)); or the National Credit Union Administration, that
    1. bars such person from association with an entity regulated by such commission, authority, agency, or officer or from engaging in the business of securities, insurance, banking, savings association activities, or credit union activities; or
    2. constitutes a final order based on violations of any laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct.
  8. findings by the SEC, CFTC, or an SRO that a person: 1) "willfully" violated the federal securities or commodities laws or the Municipal Securities Rulemaking Board rules; 2) "willfully" aided, abetted, counseled, commanded, induced, or procured such violations; or 3) failed to supervise another who commits violations of such laws or rules.
  9. certain associations with disqualified persons. In determining "association" for purposes of 34 Act Section 3(a)(39)(E), FINRA uses the definition of "associated person" set forth in 34 Act Section 3(a)(21).

Broker-dealers are required to collect and submit prospective employee fingerprints to see if, at a minimum, a statutory disqualification event has occurred in a prospective employee's past. 

In its announcement of the CGMI fine, FINRA detailed the circumstances leading to the $1.25 million fine. FINRA found that from January 2010 through May 2017, CGMI failed to conduct timely or adequate background checks on approximately 10,400 of its non-registered associated persons. Also, CGMI did not fingerprint at least 520 of the 10,400 non-registered associated persons until after they began their association with CGMI. CGMI was also unable to determine if it had timely fingerprinted another 520 non-registered persons. CGMI also limited its screening of non-registered associated persons to the screening required by federal banking laws, and not federal securities laws. Federal banking law requirements were unable to detect statutory disqualification events for three individuals who should have been barred from associating with CGMI prior to their association.

In settling this matter, CGMI neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

Many FINRA-member broker-dealers have robust compliance procedures and supervisory systems that target registered persons, but may find there are occasional oversights or lapses for employees who are not required to register. As noted above, the exceptions for fingerprinting requirements are narrow. Firms may want to consider a review of their policies and procedures in light of the FINRA announcement regarding CGMI to ensure the firm's procedures for fingerprinting all applicable persons are up-to-date.

For more information, contact Erik Hansen or another member of Ice Miller's Business Group.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.
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