The NASD on Monday censured Citigroup Global Markets Inc. and fined it $250,000 for distributing misleading sales material on hedge funds, the latest regulatory mishap for the world’s largest financial services company.
While the fine is small, it is the largest the regulator has assessed in a case involving hedge fund sales by broker-dealers. The NASD acted one day before the U.S. Securities and Exchange Commission is expected to vote to require hedge fund advisers to register with the agency, and as a result open their books to periodic SEC inspections.
The regulator said the Citigroup Inc. unit distributed 106 improper pieces of sales literature regarding hedge funds and “funds of hedge funds” between July 1, 2002 and June 30, 2003.
It said 95 pieces cited “targeted rates of return” for some investments but did not provide a sound basis for investors to evaluate the targets. Other literature, meanwhile, improperly showed hypothetical, invariably positive returns in charts and graphs, or failed to adequately disclose risks.
For example, one piece said: “The Portfolio seeks to earn an annualized return of 15% or more, net of all fees, over a three- to five-year investment horizon, while maintaining volatility below that of world equities.”
Citigroup neither admitted nor denied wrongdoing.
“We took immediate action and cooperated fully with the NASD to ensure that all materials comply with current NASD guidance,” said Susan Thomson, a spokeswoman for Smith Barney, the retail brokerage arm of Citigroup Global Markets Inc.
Despite their high fees, hedge funds have gained popularity since the recent bear market in stocks, even among such conservative investors as pension funds and endowments.
Many promise to make money in most markets and help guard against heavy losses. There about about 8,000 hedge funds with nearly $1 trillion of assets.
“As hedge funds and funds of hedge funds are marketed more and more aggressively to individual investors, ensuring that those investors receive full and accurate information is critical,” said NASD Vice Chairman Mary Schapiro.
SEC Chairman William Donaldson has pushed hard for hedge fund registration, saying the funds are targeting less well-to-do investors, and that too little is known about them. SEC commissioners voted 3-2 in July to propose the rule.
Citigroup on Monday said it will close part of its Japanese trust business and promised sharper oversight of other businesses, after Japanese regulators last month revoked its private bank license. Last week, Citigroup ousted three top executives over the matter, and said one faces possible unrelated SEC civil charges over the operation of a transfer agent unit created to serve Smith Barney mutual funds.
The NASD was formerly known as the National Association of Securities Dealers.