Monthly Archives: August 2014

Citigroup Global Markets Inc. is being fined $1.85 million for best execution and supervisory violations in non-convertible preferred securities transactions. They also ordered Citigroup to pay more than $638,000 in compensation, plus interest, to affected clients.

It was found that one of Citigroup’s trading desks employed a manual pricing methodology for non-convertible preferred securities that did not appropriately incorporate the National Best Bid and Offer (NBBO) for those securities. As securities trade on multiple exchanges, Citigroup missed the prospect of a better price for that security on an exchange other than its primary listing exchange. FINRA also found that Citigroup’s supervisory system and written supervisory dealings for best execution in non-convertible preferred securities were lacking. Finally, the firm failed to conduct supervisory reviews even though it had received several inquiry letters from FINRA staff.

“FINRA will continue to pursue firms that neglect their duty of best execution. Citigroup lacked the necessary systems and supervision to ensure that it provided customers with the executions they deserved and, as a result, customers were receiving inferior prices for more than three years,” says FINRA Executive Thomas Gira.

Investors’ fears of rising interest rates of traditional bonds, have shown an influx in these “go anywhere” funds. With a focus on returns, many investors don’t understand the risk. In the category of a nontraditional bond fund, they hold a large percentage of the portfolios in high-yield bonds, which have huge potential for default. Some of the funds are full of derivatives, along with emerging-markets bonds and illiquid bank loans. Popular unconstrained bond funds suffered declines of 25% during the 2008 financial crisis.

A complicated investment to begin with, structured notes have grown more complex the last few years and are best to be avoided. They commonly claim to limit instability in a down market. A debt instrument whose return hinges on the price movements of other assets, such as, commodities and stocks. These notes aren’t backed by any collateral and often come with substantial fees. They are purchased through a bank or third party. A knowledgeable financial adviser doesn’t offer structured notes to their clients, because of their complexity and liquidity issues.