The National Association of Securities Dealers ordered Citigroup Global Markets Inc. to pay over US$1.1 million for failing to prevent brokers from submitting false information to mutual funds in order to obtain sales load waivers.

The regulator announced that it fined Citigroup US$400,000 for supervisory and recordkeeping violations in connection with a ploy by more than 100 of its brokers to improperly obtain waivers of mutual fund sales charges by falsely claiming that their customers were disabled. The firm was also ordered to pay US$715,000 in restitution to the affected mutual fund entities.

In the U.S., deferred sales charges may be waived under certain circumstances as defined by the mutual fund prospectus — typically death, disability or a qualified distribution. The NASD found that, from June 1, 2001 through June 30, 2002, Citigroup reps improperly entered disability waivers for hundreds of customers in connection with 2,419 mutual fund transactions totaling US$47 million.

Those reps, in most cases, misrepresented on Citigroup’s electronic order entry system that their customers were entitled to waivers because they were disabled. In several instances, Citigroup registered representatives even entered waivers for hedge funds, thereby claiming that those entities were “disabled” individuals.

The NASD also ordered Citigroup to review its policies, systems, procedures and training relating to sales charge waivers in mutual fund transactions. In concluding this settlement, Citigroup neither admitted nor denied the charges, but consented to the entry of the NASD’s findings.

To date, the NASD has taken disciplinary action against five Citigroup registered reps relating to this misconduct. Its investigations into other Citigroup brokers are continuing, it notes.

“Firms are obligated to be alert for supervisory ‘red flags’ and address systemic weaknesses that could permit widespread abusive behavior,” said NASD executive vice president and head of enforcement James Shorris. “In this case, because Citigroup effectively failed to address a known problem, its representatives were able to improperly exploit the mutual funds’ fee waiver provisions that were specifically reserved for disabled individuals – extending them even to hedge funds. This widespread failure contributed to the ability of Citigroup representatives to process over 2,400 improper waivers based on false disability claims.”