In re Citigroup Global Markets

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 
                                                 UNITED                                                 STATES OF AMERICA 

                                                                     Before                                                                     the                                                                     

SECURITIES AND EXCHANGE COMMISSION 

SECURITIES ACT OF 1933 
Release No. 8557 / March 23, 2005 
SECURITIES EXCHANGE ACT OF 1934 
Release No. 51415 / March 23, 2005 
ADMINISTRATIVE PROCEEDING 
File No. 3-11869 
In the Matter of 
Citigroup Global Markets, Inc., 
Respondent. 
ORDER INSTITUTING ADMINISTRATIVE 
AND CEASE-AND-DESIST PROCEEDINGS, 
MAKING FINDINGS, AND IMPOSING 
REMEDIAL SANCTIONS AND A CEASE-
AND-DESIST ORDER PURSUANT TO 
SECTION 8A OF THE SECURITIES ACT OF 
1933 AND SECTIONS 15(b) AND 21C OF THE 
SECURITIES EXCHANGE ACT OF 1934 
I. 
The Securities and Exchange Commission (“Commission”) deems it appropriate and in the 
public interest that public administrative and cease-and-desist proceedings be, and hereby are, 
instituted pursuant to Section 8A of the Securities Act of 1933 (“Securities Act”) and Sections 
15(b) and 21C of the Securities Exchange Act of 1934 (“Exchange Act”) against Citigroup Global 
Markets, Inc. (“CGMI”).  
II. 
In anticipation of the institution of these proceedings, CGMI has submitted an Offer of 
Settlement (the “Offer”) which the Commission has determined to accept.  Solely for the purpose 
of these proceedings and any other proceedings brought by or on behalf of the Commission, or to 
which the Commission is a party, and without admitting or denying the findings herein, except as 
to the Commission’s jurisdiction over it and the subject matter of these proceedings, CGMI 
consents to the entry of this Order Instituting Administrative and Cease-and-Desist Proceedings, 
Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant to 
Section 8A of the Securities Act of 1933 and Sections 15(b) and 21C of the Securities Exchange 
Act of 1934 (“Order”), as set forth below.   

 
 
 
 
 
 
 
            
 
 
 
 
 
 
 
 
 
                                                
 
 
 
III. 
On the basis of this Order and CGMI’s Offer, the Commission finds that: 
Respondent
                        1.            Citigroup            Global            Markets,            Inc. is a broker-dealer, which, through its 
predecessors, has been registered with the Commission pursuant to Section 15 of the Exchange Act 
since 1960.  It is also a member of the National Association of Securities Dealers (“NASD”).  
CGMI’s principal offices are located in New York, New York.  CGMI uses the Smith Barney trade 
name for its retail brokerage services. CGMI is a subsidiary of Citigroup Inc., which is a publicly 
held Delaware corporation headquartered in New York, New York. 
Overview 
2. From at least January 1, 2002 through July 31, 2003, CGMI failed to 
disclose adequately certain material facts to its customers in the offer and sale of mutual fund 
shares.  At issue in this case are two distinct disclosure failures.  The first relates to CGMI’s 
revenue sharing program.  In addition to standard sales loads and 12b-1 trail payments, CGMI 
received revenue sharing payments from investment advisers and distributors associated with 
approximately 75 mutual fund complexes.
 1
  In exchange for these payments, CGMI provided 
“shelf space” to mutual funds by granting them access to, or increased visibility in, CGMI’s 
extensive retail distribution network.  The second disclosure failure relates to CGMI’s sales of 
Class B shares of mutual funds in amounts aggregating $50,000 or greater.  CGMI did not 
adequately disclose at the point of sale, in connection with its recommendations to customers to 
purchase Class B shares, that such shares were subject to higher annual fees and that those fees 
could have a negative impact on the customers’ investment returns depending upon the investment 
amount and the intended holding period. 
3. CGMI’s revenue sharing program, known as the Tier Program, created an 
undisclosed conflict of interest because CGMI offered and sold to its customers only the shares of 
those mutual fund complexes that paid CGMI additional compensation.  When CGMI 
recommended and sold mutual funds to its customers, CGMI relied upon the disclosures that fund 
companies made in their prospectuses and statements of additional information (“SAIs”), although 
1
 Generally, broker-dealers who sell mutual fund shares are compensated with front-end or 
contingent deferred sales charges or sales loads, which are paid by the customer based on the 
dollar amount of the investment.  The sales load known as a front-end load is collected from the 
customer at the time of sale of mutual fund shares, whereas the sales load known as a contingent 
deferred sales charge (“CDSC”) is collected from the customer at redemption of the mutual fund 
shares.   Some broker-dealers also receive annual payments, known as 12b-1 trails, based on the 
value of customer assets held with the mutual fund.  The 12b-1 payments are made pursuant to 
each fund’s 12b-1 plan, which sets forth the amount of the annual fee mutual funds pay for 
distribution costs, including payments to broker-dealers. 
2
 

 
 
 
  
 
 
 
 
 
  
 
 
                                                
 
 
most of those disclosures did not provide sufficient facts that would enable CGMI’s customers to 
understand the nature and scope of CGMI’s revenue sharing program.  As a result, CGMI violated 
Section 17(a)(2) of the Securities Act and Rule 10b-10 under the Exchange Act. 
4. As to the sale of Class B shares of mutual funds, at the point of sale, many 
of CGMI’s registered representatives, known as financial consultants (“FCs”), recommended Class 
B shares to certain customers without adequately disclosing the differences in share classes, 
including information about commissions and annual expenses and that an equal investment in 
Class A shares at certain dollar levels could yield a higher return.  As a result, CGMI violated 
Section 17(a)(2) of the Securities Act. 
CGMI’s Revenue Sharing Program 
5. Mutual fund complexes that were approved for sale by CGMI were 
required to make revenue sharing payments to CGMI.   
6. During the time period at issue, CGMI divided all participating fund 
complexes into one of three tiers.  There were approximately 45 fund complexes in Tiers 1 and 
2, which accounted for over 95 percent of CGMI’s mutual fund sales.  There were approximately 
30 Tier 3 fund complexes, which represented the remainder of CGMI’s overall recommended 
sales. 
7. CGMI typically charged fund complexes revenue sharing fees based on a 
combination of gross sales and assets under management.  Tier 1 and Tier 2 fund complexes paid 
15 basis points (“bps”) on gross sales of mutual fund shares and 5 to 10 bps on aged assets,
2
 and 
Tier 3 funds paid 10 bps on gross sales of mutual fund shares and 5 to 10 bps on aged assets.
3 
Such revenue sharing payments were typically paid out of the investment adviser’s or 
distributor’s assets, not from the fund’s assets, and were in addition to fees paid by the respective 
funds, such as sales charges, 12b-1 fees, shareholder servicing fees and account maintenance 
fees. 
8. CGMI did not provide any of the revenue sharing payments to its FCs or 
branch managers.  Likewise, CGMI did not provide any increased payouts or cash bonuses to its 
FCs or branch managers in connection with its revenue sharing or based upon CGMI’s tier 
designations. 
2
  Aged assets are defined as participating fund shares held over one year.  CGMI charged 10 bps 
for aged assets up to the amount of assets under management as of December 31, 2000 and 
charged 5 bps on aged assets exceeding that amount. 
3
 In 2003, CGMI began charging Tier 2 fund complexes the same fees as Tier 1 fund complexes.  
Previously, Tier 2 fund complexes paid the same fees as Tier 3 fund complexes. 
3
 

 
 
 
 
 
 
  
 
  
 
 
  
 
 
 
  
 
9. CGMI used the above-referenced formulas to calculate the payments due 
and mailed invoices each quarter to the fund complexes, which then remitted payment in the form 
of checks or money transfers.  
10. CGMI provided certain benefits to the fund complexes in Tier 1 and Tier 
2. Based principally on the number and variety of funds offered, length of track record, size of 
assets under management, ability to support FCs and customers through training and education, 
and level of FC and customer demand, CGMI allowed only Tier 1 and Tier 2 fund complexes to 
have direct access to its FCs, subject to branch manager approval.  Only Tier 1 and Tier 2 fund 
complexes could contact CGMI’s branch offices for meetings where the fund complexes could 
have direct contact with interested FCs.  Tier 1 fund complexes also generally received greater 
agenda space at sales meetings and conferences, were permitted more frequent access to the 
branch offices and had access to CGMI’s FCs through CGMI’s in-house publications and 
broadcasts.  By comparison, Tier 3 fund complexes did not receive such visibility within 
CGMI’s retail network. 
CGMI Did Not Adequately Disclose its Revenue Sharing Program to its Customers 
11. From at least January 1, 2002 through July 31, 2003, CGMI did not 
adequately disclose to its customers, who purchased mutual fund shares, the existence of the 
revenue sharing program and CGMI’s receipt of these additional payments pursuant to the 
program. 
12. CGMI disclosed information to customers concerning mutual fund 
purchases primarily through its FCs’ direct contacts with customers and by supplying customers 
with prospectuses and, if requested, SAIs issued by the mutual funds.  CGMI had no policies or 
procedures requiring FCs to disclose to their customers the existence of CGMI’s revenue sharing 
program. 
13. Instead, CGMI relied on the participating funds’ prospectuses and SAIs to 
satisfy its disclosure obligations with regard to its revenue sharing program.  Although some of the 
prospectuses and SAIs contained various disclosures concerning payments to the broker-dealers 
distributing their funds, most of the disclosures were generally vague and lacked sufficient 
information to inform CGMI’s customers of the nature and scope of CGMI’s revenue sharing 
program.  For example, the prospectuses and SAIs did not specifically disclose the magnitude of 
the revenue sharing payments that CGMI received from the fund complexes or that certain fund 
complexes had greater access to, or increased visibility in, CGMI’s retail network.  As a result, 
CGMI’s customers were not provided with sufficient information to appreciate the dimension of 
the conflict of interest the revenue sharing program created.   
14. Beginning in July 2003, CGMI amended and began improving 
confirmation disclosures relating to its revenue sharing program. In addition, CGMI requested 
that participating mutual fund complexes enhance their disclosures in their prospectuses and 
SAIs regarding revenue sharing payments.   
4
 

 
               
 
 
 
 
 
 
 
 
 
 
 
 
                                                
 
 
 
 15. Based on the foregoing, CGMI willfully
4
 violated: 
a. Section 17(a)(2) of the Securities Act, which provides that it is “unlawful 
for any person in the offer or sale of any securities . . . by the use of any means or 
instruments of transportation or communication in interstate commerce or by use of 
the mails, directly or indirectly . . . to obtain money or property by means of any 
untrue statement of a material fact or any omission to state a material fact necessary 
in order to make the statements made, in light of the circumstances under which 
they made, not misleading;” and 
b. Rule 10b-10 under the Exchange Act, which provides in pertinent part that “it 
shall be unlawful for any broker or dealer to effect for or with an account of a 
customer any transaction in, or to induce the purchase or sale by such customer of, 
any security  . . . unless such broker or dealer, at or before completion of such 
transaction, gives or sends to such customer written notification disclosing . . . the 
source and amount of any other remuneration received or to be received by the 
broker in connection with the transaction.” 
16. Certain broker-dealers affiliated with CGMI, namely Citicorp Investment 
Services, PFS Investments, Inc. and Tower Square Securities Inc. (collectively the “Affiliates”), 
voluntarily reported through CGMI to the Commission staff that, during the relevant time period, 
they also had revenue sharing programs similar to CGMI’s program.
5
  Like CGMI, the Affiliates 
did not provide their FCs and branch managers with any increased payouts or cash bonuses in 
connection with their revenue sharing programs.  However, the programs varied, among other 
areas, in the number of tiers, the calculation of the payments and the access granted to the fund 
complexes participating in the programs.  In addition, the Affiliates received some revenue sharing 
payments in the form of directed brokerage from certain fund complexes in connection with their 
respective revenue sharing arrangements.
6
  The Affiliates, as did CGMI, relied on the participating 
fund complexes’ prospectuses and SAIs to satisfy their obligations with regard to their revenue 
sharing programs and did not provide any additional disclosures to their customers.  As noted 
above, these documents generally did not provide adequate disclosures to customers about the 
nature and scope of the revenue sharing programs. 
4
 “Willfully” as used in the Order means intentionally committing the act which constitutes the 
violation, see Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000); Tager v. SEC, 344 F.2d 5, 
8 (2d Cir. 1965).  There is no requirement that the actor also be aware that he is violating one of 
the Rules or Act.  Id. 
5
 Like CGMI, the Affiliates are also subsidiaries of Citigroup, Inc. 
6
 The receipt of such payments was substantially discontinued in 2001.   
5


 
 
 
 
 
 
 
  
 
                                                
 
 
 
CGMI’s Sale of Class B Shares 
17. CGMI recommends mutual funds that issue different classes of shares, 
including Class A and Class B shares, which represent interests in the same portfolio of 
securities, but differ in the structure and amount of sales charges paid directly by shareholders 
and continuous, asset-based fees assessed on each shareholder’s account. 
18.     Class A shares are subject to a front-end load, or initial sales charge, when 
originally purchased, and have modest annual fund expenses, including 12b-1 fees that are 
typically 0.25 percent.  The majority of the front-end load is paid to the selling broker-dealer as a 
commission.  The balance of the initial investment is paid for the fund’s shares. Typically, the 
front-end load decreases as the size of the investment increases.  This concept applies to both 
single purchases and to multiple purchases in the same family of funds that may be aggregated 
with the customer’s other investments, as well as investments by that customer’s household, as 
permitted by the funds' prospectuses.  For most investments in which the total dollar amount 
invested in a fund family is $1 million or more, the front-end load is generally waived.  These 
discounts are commonly referred to as “breakpoints” and the discounts typically increase at each 
of the $50,000, $100,000, $250,000, $500,000 and $1 million levels.  
19. For example, for CGMI’s affiliated proprietary funds, investments in 
Class A shares that, when aggregated, fall below $25,000 are subject to an initial sales charge 
that can range from 4.00 to 5.00 percent.  However, for an investment: (i) between $25,000 and 
$49,999 the sales charge can range from 3.50 to 4.25 percent; (ii) between $50,000 and $99,999 
the sales charge can range from 3.00 to 3.75 percent; (iii) between $100,000 and $249,999 the 
sales charge can range from 2.50 to 3.25 percent; (iv) between $250,000 and $499,999 the sales 
charge can range from 1.50 to 2.75 percent; (v) between $500,000 and $999,999 the sales charge 
can range from zero to 2.00 percent; and (vi) $1 million or more reduces the sales charge to zero.  
These breakpoints reduce the commissions paid to the selling broker-dealers by a corresponding 
amount.  Investors can receive the benefits of breakpoint discounts by, among other ways, 
making a single investment, aggregating purchases, employing rights of accumulation or 
utilizing letters of intent.
7 
20. In contrast, Class B shares do not carry any front-end sales charge and do 
not have breakpoints regardless of the size of the investment.  To compensate for the absence of 
a front-end sales charge, Class B shares have significantly higher annual 12b-1 fees (typically 
1.00 percent) than Class A shares (typically 0.25 percent) and are subject to a contingent 
deferred sales charge (“CDSC”) if redeemed prior to the expiration of a holding period specified 
7
  A right of accumulation permits an investor or an eligible group of related investors (e.g., the 
customer, the spouse and minor children) to “accumulate” or combine existing holdings of shares 
of a particular fund complex with additional purchases of shares of the same fund complex for 
the purpose of achieving breakpoints and associated discounts. Customers may also qualify for 
breakpoints by executing a letter of intent, which is an agreement to make multiple purchases of 
Class A shares issued by a fund family over a period of time, usually around 13 months, which, 
when aggregated, equal an amount that qualifies for a breakpoint discount. 
6
 

 
 
    
 
   
 
  
 
 
 
   
 
   
in the prospectus.  The amount of the CDSC, generally calculated as a percentage of the lesser of 
the purchase price or the account’s value at the time of the sale, declines each year and 
eventually disappears entirely.  Class B shares usually convert to Class A shares, at no cost to the 
investor, generally after eight years.  
21. For investors, breakpoints and higher expenses generally have a direct and 
significant impact on a mutual fund investment’s return.  The significance of these differences is 
that, at certain dollar levels and holding periods, an equal investment in Class A shares, as 
opposed to Class B shares, may be in the best interest of the investor. 
22. With regard to Class B shares, the mutual fund distributor, which is 
generally an affiliate of the mutual fund, advances a commission to the selling broker-dealer. 
Because Class B shares do not offer breakpoint discounts, broker-dealers and their 
representatives receive greater commissions from the sale of Class B shares than from the sale of 
the same amount of Class A shares if the sale would qualify for breakpoint discounts.  Mutual 
fund complexes, through their distributors, recoup the commissions they advance for Class B 
shares through the substantially higher Rule 12b-1 fees and/or the CDSC.  The different fee 
structures, expenses and characteristics of Class A and Class B shares, including the availability 
of breakpoint discounts with regard to purchases of Class A shares, and the impact of CDSCs on 
investments in Class B shares, are described in the mutual fund prospectuses and SAIs. 
23. From January 1, 2002 through July 31, 2003, CGMI recommended and 
sold Class B shares of mutual funds to customers who, depending on the amount of the 
investment and the holding period, generally would have benefited had they purchased Class A 
shares instead.  Specifically, these customers made purchases of Class B shares in various mutual 
funds which, had they purchased Class A shares, could have qualified for breakpoints beginning 
at the $50,000 level, through single purchases, aggregating multiple purchases, employing rights 
of accumulation or utilizing letters of intent.  As a result of the customers’ purchases of Class B 
shares, CGMI received greater commissions from these transactions than it would have earned 
had it sold Class A shares of the same mutual funds. 
CGMI’s Policies and Procedures Regarding Class B Shares 
24. CGMI had certain policies requiring FCs to disclose to customers certain 
information regarding Class B shares.  For example, the firm’s Mutual Fund Sales Practices 
Compliance Manual required FCs to disclose, among other things: (i) types of sales charges and 
fees; (ii) multiple classes of securities; (iii) options for reduced or waived sales charges 
(including breakpoints); (iv) multiple fund purchases; and (v) expense ratios.  More specifically, 
the manual required that FCs assist each customer in deciding which class of shares was likely to 
be most advantageous given the customer’s individual circumstances.   
25. Although CGMI had certain written policies requiring disclosures about 
the various classes of fund shares, CGMI’s procedures were not sufficient to ensure that FCs 
made such disclosures to their customers, other than providing them with prospectuses.  Among 
other things, FCs, when recommending and selling Class B shares of mutual fund shares to 
7
 

 
 
  
 
   
  
 
 
  
 
 
 
 
 
 
 
                                                
 
customers, did not adequately disclose that: (i) such shares were subject to higher annual fees 
that could have a negative impact on the customers’ investment return, or (ii) once breakpoints 
become available beginning at the $50,000 level, an equal investment in Class A shares could 
yield a higher return. 
26. In July 2003, CGMI began to change its procedures with regard to the sale 
of mutual funds, including through the implementation of blocks on the sale of Class B shares 
where the customer would be in a more advantageous financial position by purchasing Class A 
shares. 
27. As a result of the foregoing, CGMI willfully
8
 violated Section 17(a)(2) of 
the Securities Act. 
28. In determining whether to accept CGMI’s Offer, the Commission has 
considered a related disciplinary action by the NASD involving CGMI’s sale of Class B shares 
during the same time period covered by the Order.  In its Acceptance, Waiver and Consent 
submitted to the NASD to resolve that matter, CGMI has agreed to pay to the NASD a fine of 
$6.25 million and to undertake certain remedial and corrective actions for the benefit of investors. 
29. CGMI has obtained corporate resolutions of the Boards of Directors of 
Citigroup, Inc. or an appropriate corporate parent of the Affiliates directing each of the Affiliates to 
comply fully with the undertakings in paragraph 30 below to the extent that such undertakings 
specifically apply to the Affiliates.  CGMI has also obtained a corporate resolution of the parent 
corporation directing that CGMI shall take all steps reasonable and necessary to obtain such 
compliance by the Affiliates.  All resolutions shall remain in effect until such time as CGMI has 
completed, and has ensured that the Affiliates have complied with, all such undertakings. 
Undertakings 
30. CGMI undertakes the following: 
a. CGMI shall place and maintain on its website, within 30 days from the date 
of entry of the Order, disclosures regarding its revenue sharing program to include, 
if applicable:  (i) the existence of the program; (ii) the fund complexes participating 
in the program; (iii) the maximum amount of payment that CGMI receives, 
expressed in basis points, in connection with the fund complexes’ participation in 
the program; and (iv) the source of such payments.  CGMI shall make this 
information available via a hyperlink on the home page of its website. CGMI shall 
also cause the Affiliates to take the same actions within 30 days from the date of 
entry of the Order. 
8
 “Willfully” as used in the Order means intentionally committing the act which constitutes the 
violation, see Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000); Tager v. SEC, 344 F.2d 5, 
8 (2d Cir. 1965).  There is no requirement that the actor also be aware that he is violating one of 
the Rules or Act.  Id. 
8
 

 
 
 
 
 
 
  
 
 
 
 
 
 
 
                                                
 
 
b. CGMI shall retain, within 60 days from the date of entry of the Order, the 
services of an Independent Consultant, who is not unacceptable to the 
Commission’s staff.  CGMI shall require the Independent Consultant to perform all 
of the services and tasks as described below.  CGMI shall exclusively bear all costs, 
including compensation and expenses, associated with the retention and 
performance of the Independent Consultant.   
c. CGMI shall retain and shall require the Independent Consultant to conduct a 
comprehensive review of: (i) the completeness of the disclosures regarding CGMI’s 
Tier Program and the differences in mutual fund share classes; and (ii) the policies 
and procedures relating to CGMI’s recommendations to its customers of mutual 
funds in the Tier Program and of different class shares of mutual funds.  CGMI 
shall retain the Independent Consultant to recommend policies and procedures to 
ensure compliance with applicable statutory and regulatory requirements in these 
areas. 
d. CGMI shall, within 90 days from the date of entry of the Order, provide to 
the Independent Consultant a list of customers who purchased Class B shares 
between January 1, 2002 and the date of entry of the Order (the “relevant time 
period”), of $50,000 or greater, including, without limitation, through single and 
multiple purchases by the customer(s) and through aggregation by household
9
 and 
fund family of all purchases during the relevant time period. The list must include 
at least the customers’ names and contact information, any firm-based household 
identification number, the date, fund name, fund symbol and number of shares 
purchased, and the gross principal amount invested for every purchase.  Every 
purchase transaction on the list is a “Qualifying Purchase.”  However, Qualifying 
Purchases shall not include: 
(i)	 purchases of Class B shares for which customers have previously 
settled and signed releases of claims against CGMI;  
(ii)	 purchases of Class B shares which were later cancelled at no cost to 
the customer; 
(iii)	 purchases of Class B shares, which, when aggregated with other 
Class B share purchases by the same household in the same fund 
family, total less than $100,000, and for which the customer would 
have been charged a Class A share initial sales charge exceeding 
4.00 percent; 
9
 “Household” includes all accounts that are related by at least two of the following three factors: 
(1) tax identification/social security numbers; (2) address; and (3) last or "key" name. 
9
 

 
 
 
 
 
 
 
 
 
 
 
                                                
 
 
 
(iv)	 purchases of Class B shares, which, when aggregated with other 
Class B share purchases by the same household in the same fund 
family, total less than $100,000, and where the customer (1) entered 
into a systematic withdrawal plan at the time of the Class B share 
purchase, and immediately began receiving systematic withdrawals 
from the Class B share purchase without incurring CDSCs, or (2) 
chose not to reinvest all capital gains and dividends from the Class 
B share purchase; 
(v)	 purchases of Class B shares, which, assuming a 5 percent annual 
rate of return and considering all expenses, are projected to have a 
higher redemption value, determined as of the end of each year 
following the purchase date, in comparison to Class A shares in any 
two years during the period beginning with the effective date of the 
Order and ending on the date the Class B shares are scheduled to 
automatically convert to Class A shares under the terms of the fund 
prospectuses in effect at the time of the purchase; and 
(vi)	 purchases of Class B shares, which, assuming a 5 percent annual 
rate of return and considering all expenses during the relevant time 
period, are projected, as of the date of conversion, to have a value 
within $100.00 of the projected value of Class A shares had the 
customers purchased Class A shares instead of Class B shares.
10 
e. Additionally, within 150 days from the date of entry of the Order, CGMI 
shall offer any customer who made a Qualifying Purchase(s) and still holds all 
such shares, the option of converting such Class B shares into Class A shares in 
such a manner that each customer is placed in the same financial position, based 
on actual fund performance, in which such customer would have been, as of the 
date no more than 10 business days prior to the date on which the offered 
conversion to Class A shares is to be completed, with respect to the Qualifying 
Purchase(s) had the customer purchased Class A shares instead of Class B shares 
(the “Settlement Plan”).  
f. The Independent Consultant, following consultation with CGMI, may 
further remove from the Settlement Plan additional Class B share purchases as 
long as the Independent Consultant provides CGMI and the Commission’s staff 
with quantitative proof that the customer could not materially benefit
11
 from 
10
 In addition, the Qualifying Purchases shall not include purchases of Class B shares which 
would not have been eligible for breakpoints at or above specified thresholds in certain mutual 
funds as identified on a list to be provided to the Independent Consultant. 
11
 The Settlement Plan shall provide that CGMI will not be required to offer a customer 
conversion if the customer would not materially benefit from an offer of conversion because 
10
 

 
 
 
 
 
 
 
 
                                                                                                                                                            
 
 
 
 
 
having the particular transaction converted to Class A shares and the removal of 
such Qualifying Purchase is not unacceptable to the Commission’s staff. 
g. The Settlement Plan shall also provide for the payment of cash, subject to 
each customer’s choice not to receive payment, to put those customers who made 
a Qualifying Purchase(s) and sold, prior to receipt of notice from CGMI, some or 
all of their Class B shares comprising the Qualifying Purchase(s) into the same 
financial position, based on actual fund performance and redemption value, when 
aggregating Qualified Purchases, in which such customers would have been had 
the Class B shares that were sold been invested in Class A shares instead. 
h. Under the Settlement Plan, each customer shall be entitled to breakpoints 
to the extent permitted by each relevant fund family based on all eligible 
holdings
12 
and applicable rights of accumulation and assuming letters of intent 
were utilized in accordance with the applicable prospectuses.  
i. In the event that any customer, who made a Qualifying Purchase(s), elects 
to convert those purchases to Class A shares from Class B, and CGMI is unable to 
effectuate such conversion for any reason, CGMI shall be required under the 
Settlement Plan to provide for the payment of cash, subject to each customer’s 
choice not to receive payment, to such customer in an amount that will place the 
customer in the same financial position, based on actual performance and 
redemption value, that such customer would have been in as of the date of entry 
of the Order had the customer made his Qualifying Purchase(s) in Class A shares 
instead of Class B. 
j. The Settlement Plan shall not be unacceptable to the Independent 
Consultant and the Commission’s staff.   
k. Additionally, as part of the Settlement Plan, within 120 days from the date 
of entry of the Order, CGMI shall submit to the Independent Consultant and the  
Commission’s staff for review sample letters in plain English: (i) offering each 
customer, according to the particular characteristics of their account and 
purchases, the opportunity to convert in accordance with the Settlement Plan 
and/or cash payment, subject to each customer’s choice not to receive payment, 
either the annual expense differential between Class A shares and Class B shares, the CDSC 
schedule, and/or the conversion year quantitatively are such that Class B shares may be 
substantially equal, or more appropriate, compared to Class A shares of the same fund, at 
particular investment levels.  
12
 Eligible holdings means the balance of all investments permitted by the relevant fund family to 
be aggregated for applicable breakpoints at the time of the Qualifying Purchase, including 
investments made before and held at the time of, the Qualifying Purchase. 
11
 

 
 
 
 
 
 
 
 
for any portions of Qualifying Purchases that have been sold; (ii) explaining the 
economic advantages and disadvantages to the customer of the options; and (iii) 
stating that the customer should consult with a tax advisor to determine whether 
the conversion carries any federal, state, or local tax consequences.  Such letters 
may include other factors that customers may reasonably rely upon when deciding 
whether to convert.  The letter shall not be unacceptable to the Independent 
Consultant and the Commission’s staff.  
l. CGMI shall fully complete execution of the Settlement Plan within 270 
days from the date of entry of the Order.   
m. CGMI shall further retain and shall require the Independent Consultant to 
prepare and, within 150 days from the date of entry of the Order, submit to CGMI 
and the Commission’s staff an Initial Report.  The Initial Report shall address, at a 
minimum:  (i) the adequacy of the disclosures regarding CGMI’s revenue sharing 
program; (ii) the adequacy of CGMI’s disclosures of the differences in mutual fund 
share classes; (iii) the adequacy of the policies and procedures regarding CGMI’s 
recommendations and disclosures to its customers of mutual funds in its revenue 
sharing program; (iv) the adequacy of the policies and procedures regarding 
CGMI’s recommendations and disclosures to its customers of mutual fund share 
classes; and the (v) the adequacy of the Settlement Plan, with a goal toward placing 
CGMI customers who made Qualifying Purchases in the same financial positions 
they would have been had they purchased Class A shares instead of Class B shares.  
The Initial Report must include a description of the review performed, the 
conclusions reached, and the Independent Consultant's recommendations for 
policies and procedures to ensure compliance with all applicable statutory and 
regulatory requirements in these areas, an effective system for implementing the 
recommended policies and procedures and an effective system for establishing and 
maintaining written records that evidence compliance with the recommended 
policies and procedures.   
n. Within 180 days from the date of entry of the Order, CGMI shall in writing 
advise the Independent Consultant and the Commission’s staff of the 
recommendations from the Initial Report that it is adopting and the 
recommendations that it considers to be unnecessary or inappropriate. With respect 
to any recommendation that CGMI considers unnecessary or inappropriate, CGMI 
shall explain why the objective or purpose of such recommendation is unnecessary 
or inappropriate and provide in writing an alternative policy, procedure or system 
designed to achieve the same objective or purpose.  
o. With respect to any recommendation with which CGMI and the 
Independent Consultant do not agree, CGMI shall attempt in good faith to reach an 
agreement with the Independent Consultant within 210 days from the date of entry 
of the Order.  In the event the Independent Consultant and CGMI are unable to 
12
 

 
 
  
 
 
 
 
 
 
 
agree on an alternative proposal not unacceptable to the Commission’s staff, CGMI 
shall abide by the recommendation of the Independent Consultant. 
p. CGMI shall further retain and shall require the Independent Consultant to 
complete the aforementioned review and submit a written Final Report to CGMI 
and to the Commission’s staff within 270 days from the date of entry of the Order. 
The Final Report must recite the efforts the Independent Consultant undertook to 
review: (i) CGMI’s disclosures regarding its revenue sharing program; (ii) CGMI’s 
disclosures regarding the differences in mutual fund share classes; (iii) the policies 
and procedures regarding CGMI’s recommendations of the mutual funds in its 
revenue sharing program; (iv) the policies and procedures regarding CGMI’s 
recommendations and disclosures to customers of multi-class mutual funds; and (v) 
the procedures to administer the Settlement Plan and the completeness of the 
implementation of the Settlement Plan.  The Final Report shall also set forth in 
detail the Independent Consultant's recommendations and a reasonable time 
period(s), not to exceed 300 days from the date of entry of the Order, for CGMI to 
implement its recommendations.  The Final Report must also describe how CGMI 
proposes to implement those recommendations within the time period(s) set forth in 
the Final Report. 
q. CGMI shall take all necessary and appropriate steps to adopt and implement 
all recommendations and proposals contained in the Independent Consultant's Final 
Report.  In addition, CGMI shall cause the Affiliates to implement all of the 
recommendations and proposals relating to revenue sharing contained in the 
Independent Consultant's Final Report, as applicable. 
r. CGMI shall further retain and shall require the Independent Consultant to 
conduct a follow-up review of CGMI's efforts to implement each of the 
recommendations contained in the Independent Consultant's Final Report, as 
applicable.  This follow-up review shall be completed no later than 360 days from 
the date of entry of the Order.  As part of the follow-up review process, CGMI shall 
retain and shall require the Independent Counsel to submit a follow-up report to the 
Commission’s staff no later than 375 days from the date of entry of the Order.  The 
follow-up report must set forth the details of CGMI's and the Affiliates’ efforts to 
implement each of the recommendations contained in the Final Report, and must 
separately state whether CGMI and the Affiliates have fully complied with each of 
the recommendations in the Final Report, as applicable.   
s. To ensure the independence of the Independent Consultant, CGMI:  (i) shall 
not have the authority to terminate the Independent Consultant, without the prior 
written approval of the Commission’s staff; (ii) shall compensate the Independent 
Consultant, and persons engaged to assist the Independent Consultant, for services 
rendered pursuant to the Order at their reasonable and customary rates; and (iii) 
shall not be in and shall not have an attorney-client relationship with the 
Independent Consultant and shall not seek to invoke the attorney-client or any other 
13
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
doctrine or privilege to prevent the Independent Consultant from transmitting any 
information, reports or documents to the Commission or the Commission’s staff. 
t. To further ensure the independence of the Independent Consultant, for the 
period of the engagement and for a period of two years from completion of the 
engagement, CGMI, its present or former affiliates, directors, officers, employees, 
and agents acting in their capacity shall not enter into any employment, consultant, 
attorney-client, auditing or other professional relationship with Independent 
Consultant.  Further, CGMI, its present or former affiliates, directors, officers, 
employees, and agents acting in their capacity shall not enter into any employment, 
consultant, attorney-client, auditing or other professional relationship with any firm, 
with which the Independent Consultant is affiliated in performance of his or her 
duties under the Order, or agents acting in their capacity, for the period of the 
engagement and for a period of two years after the engagement without prior 
written consent of the Commission’s staff. 
u. CGMI shall cooperate fully with the Independent Consultant and shall 
provide the Independent Consultant with prompt access to CGMI’s and the 
Affiliates’ files, books, records and personnel as the Independent Consultant 
reasonably deems necessary or appropriate in fulfilling any function or completing 
any task described in these undertakings. 
v. For good cause shown, and upon receipt of a timely application from the 
Independent Consultant or CGMI, the Commission's staff may extend any of the 
procedural dates set forth above. 
IV. 
In view of the foregoing, the Commission deems it appropriate, in the public interest, and 
for the protection of investors, to impose the sanctions agreed to in CGMI’s Offer. 
Accordingly, pursuant to Section 8A of the Securities Act and Sections 15(b) and 21C of 
the Exchange Act, it is hereby ORDERED that: 
1. CGMI shall cease and desist from committing or causing any violations and any 
future violations of Section 17(a) of the Securities Act and Rule 10b-10 under the Exchange Act;  
2. CGMI is censured;  
3. CGMI shall, within 30 days from the date of entry of the Order, pay a civil money 
penalty in the amount of $20 million to the United States Treasury.  Such payment shall be: (A) 
made by United States postal money order, certified check, bank cashier's check or bank money 
order; (B) made payable to the Securities and Exchange Commission; (C) hand-delivered or 
mailed to the Office of Financial Management, Securities and Exchange Commission, Operations 
14
 

 
 
 
 
   
 
 
 
 
   
 
Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (D) submitted under cover 
letter that identifies CGMI as a Respondent in these proceedings, the file number of these  
proceedings, a copy of which cover letter and money order or check shall be sent to Arthur S. 
Gabinet, Securities and Exchange Commission, Mellon Independence Center, 701 Market St., 
Suite 2000, Philadelphia, PA  19106;  and 
4. CGMI shall comply with the undertakings enumerated in Section III.30. above. 
            By            the            Commission.            
       Jonathan G. Katz
       Secretary 
15
 

UNITED STATES OF AMERICA 

 Before the 


SECURITIES AND EXCHANGE COMMISSION 


SECURITIES ACT OF 1933 
Release No. 8557 / March 23, 2005 

SECURITIES EXCHANGE ACT OF 1934 
Release No. 51415 / March 23, 2005 

ADMINISTRATIVE PROCEEDING 
File No. 3-11869 

In the Matter of 

Citigroup Global Markets, Inc., 

Respondent. 

ORDER INSTITUTING ADMINISTRATIVE 
AND CEASE-AND-DESIST PROCEEDINGS, 
MAKING FINDINGS, AND IMPOSING 
REMEDIAL SANCTIONS AND A CEASE-
AND-DESIST ORDER PURSUANT TO 
SECTION 8A OF THE SECURITIES ACT OF 
1933 AND SECTIONS 15(b) AND 21C OF THE 
SECURITIES EXCHANGE ACT OF 1934 

I. 

The Securities and Exchange Commission (“Commission”) deems it appropriate and in the 
public interest that public administrative and cease-and-desist proceedings be, and hereby are, 
instituted pursuant to Section 8A of the Securities Act of 1933 (“Securities Act”) and Sections 
15(b) and 21C of the Securities Exchange Act of 1934 (“Exchange Act”) against Citigroup Global 
Markets, Inc. (“CGMI”).  

II. 

In anticipation of the institution of these proceedings, CGMI has submitted an Offer of 
Settlement (the “Offer”) which the Commission has determined to accept.  Solely for the purpose 
of these proceedings and any other proceedings brought by or on behalf of the Commission, or to 
which the Commission is a party, and without admitting or denying the findings herein, except as 
to the Commission’s jurisdiction over it and the subject matter of these proceedings, CGMI 
consents to the entry of this Order Instituting Administrative and Cease-and-Desist Proceedings, 
Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant to 
Section 8A of the Securities Act of 1933 and Sections 15(b) and 21C of the Securities Exchange 
Act of 1934 (“Order”), as set forth below.   



 

 

 
 

 
 

 
 

 

 
 

 
 

 

 

 
 

                                                 

 

 

III. 
On the basis of this Order and CGMI’s Offer, the Commission finds that: 

Respondent

  1. Citigroup Global Markets, Inc. is a broker-dealer, which, through its 
predecessors, has been registered with the Commission pursuant to Section 15 of the Exchange Act 
since 1960. It is also a member of the National Association of Securities Dealers (“NASD”).  
CGMI’s principal offices are located in New York, New York.  CGMI uses the Smith Barney trade 
name for its retail brokerage services. CGMI is a subsidiary of Citigroup Inc., which is a publicly 
held Delaware corporation headquartered in New York, New York. 

Overview 

2. From at least January 1, 2002 through July 31, 2003, CGMI failed to 
disclose adequately certain material facts to its customers in the offer and sale of mutual fund 
shares. At issue in this case are two distinct disclosure failures.  The first relates to CGMI’s 
revenue sharing program. In addition to standard sales loads and 12b-1 trail payments, CGMI 
received revenue sharing payments from investment advisers and distributors associated with 
approximately 75 mutual fund complexes. 1  In exchange for these payments, CGMI provided 
“shelf space” to mutual funds by granting them access to, or increased visibility in, CGMI’s 
extensive retail distribution network.  The second disclosure failure relates to CGMI’s sales of 
Class B shares of mutual funds in amounts aggregating $50,000 or greater.  CGMI did not 
adequately disclose at the point of sale, in connection with its recommendations to customers to 
purchase Class B shares, that such shares were subject to higher annual fees and that those fees 
could have a negative impact on the customers’ investment returns depending upon the investment 
amount and the intended holding period. 

3. CGMI’s revenue sharing program, known as the Tier Program, created an 
undisclosed conflict of interest because CGMI offered and sold to its customers only the shares of 
those mutual fund complexes that paid CGMI additional compensation.  When CGMI 
recommended and sold mutual funds to its customers, CGMI relied upon the disclosures that fund 
companies made in their prospectuses and statements of additional information (“SAIs”), although 

1 Generally, broker-dealers who sell mutual fund shares are compensated with front-end or 
contingent deferred sales charges or sales loads, which are paid by the customer based on the 
dollar amount of the investment.  The sales load known as a front-end load is collected from the 
customer at the time of sale of mutual fund shares, whereas the sales load known as a contingent 
deferred sales charge (“CDSC”) is collected from the customer at redemption of the mutual fund 
shares. Some broker-dealers also receive annual payments, known as 12b-1 trails, based on the 
value of customer assets held with the mutual fund.  The 12b-1 payments are made pursuant to 
each fund’s 12b-1 plan, which sets forth the amount of the annual fee mutual funds pay for 
distribution costs, including payments to broker-dealers. 

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most of those disclosures did not provide sufficient facts that would enable CGMI’s customers to 
understand the nature and scope of CGMI’s revenue sharing program.  As a result, CGMI violated 
Section 17(a)(2) of the Securities Act and Rule 10b-10 under the Exchange Act. 

4. As to the sale of Class B shares of mutual funds, at the point of sale, many 
of CGMI’s registered representatives, known as financial consultants (“FCs”), recommended Class 
B shares to certain customers without adequately disclosing the differences in share classes, 
including information about commissions and annual expenses and that an equal investment in 
Class A shares at certain dollar levels could yield a higher return.  As a result, CGMI violated 
Section 17(a)(2) of the Securities Act. 

CGMI’s Revenue Sharing Program 

5. Mutual fund complexes that were approved for sale by CGMI were 
required to make revenue sharing payments to CGMI.   

6. During the time period at issue, CGMI divided all participating fund 
complexes into one of three tiers.  There were approximately 45 fund complexes in Tiers 1 and 
2, which accounted for over 95 percent of CGMI’s mutual fund sales.  There were approximately 
30 Tier 3 fund complexes, which represented the remainder of CGMI’s overall recommended 
sales. 

7. CGMI typically charged fund complexes revenue sharing fees based on a 
combination of gross sales and assets under management.  Tier 1 and Tier 2 fund complexes paid 
15 basis points (“bps”) on gross sales of mutual fund shares and 5 to 10 bps on aged assets,2 and 
Tier 3 funds paid 10 bps on gross sales of mutual fund shares and 5 to 10 bps on aged assets.3 

Such revenue sharing payments were typically paid out of the investment adviser’s or 
distributor’s assets, not from the fund’s assets, and were in addition to fees paid by the respective 
funds, such as sales charges, 12b-1 fees, shareholder servicing fees and account maintenance 
fees. 

8. CGMI did not provide any of the revenue sharing payments to its FCs or 
branch managers.  Likewise, CGMI did not provide any increased payouts or cash bonuses to its 
FCs or branch managers in connection with its revenue sharing or based upon CGMI’s tier 
designations. 

2  Aged assets are defined as participating fund shares held over one year.  CGMI charged 10 bps 
for aged assets up to the amount of assets under management as of December 31, 2000 and 
charged 5 bps on aged assets exceeding that amount. 

3 In 2003, CGMI began charging Tier 2 fund complexes the same fees as Tier 1 fund complexes.  
Previously, Tier 2 fund complexes paid the same fees as Tier 3 fund complexes. 

3
 



 

 

 

 
 

 
  

 
  

 

 
  

 

 

 
  

 

9. CGMI used the above-referenced formulas to calculate the payments due 
and mailed invoices each quarter to the fund complexes, which then remitted payment in the form 
of checks or money transfers.  

10. CGMI provided certain benefits to the fund complexes in Tier 1 and Tier 
2. Based principally on the number and variety of funds offered, length of track record, size of 
assets under management, ability to support FCs and customers through training and education, 
and level of FC and customer demand, CGMI allowed only Tier 1 and Tier 2 fund complexes to 
have direct access to its FCs, subject to branch manager approval.  Only Tier 1 and Tier 2 fund 
complexes could contact CGMI’s branch offices for meetings where the fund complexes could 
have direct contact with interested FCs.  Tier 1 fund complexes also generally received greater 
agenda space at sales meetings and conferences, were permitted more frequent access to the 
branch offices and had access to CGMI’s FCs through CGMI’s in-house publications and 
broadcasts. By comparison, Tier 3 fund complexes did not receive such visibility within 
CGMI’s retail network. 

CGMI Did Not Adequately Disclose its Revenue Sharing Program to its Customers 

11. From at least January 1, 2002 through July 31, 2003, CGMI did not 
adequately disclose to its customers, who purchased mutual fund shares, the existence of the 
revenue sharing program and CGMI’s receipt of these additional payments pursuant to the 
program. 

12. CGMI disclosed information to customers concerning mutual fund 
purchases primarily through its FCs’ direct contacts with customers and by supplying customers 
with prospectuses and, if requested, SAIs issued by the mutual funds.  CGMI had no policies or 
procedures requiring FCs to disclose to their customers the existence of CGMI’s revenue sharing 
program. 

13. Instead, CGMI relied on the participating funds’ prospectuses and SAIs to 
satisfy its disclosure obligations with regard to its revenue sharing program.  Although some of the 
prospectuses and SAIs contained various disclosures concerning payments to the broker-dealers 
distributing their funds, most of the disclosures were generally vague and lacked sufficient 
information to inform CGMI’s customers of the nature and scope of CGMI’s revenue sharing 
program.  For example, the prospectuses and SAIs did not specifically disclose the magnitude of 
the revenue sharing payments that CGMI received from the fund complexes or that certain fund 
complexes had greater access to, or increased visibility in, CGMI’s retail network.  As a result, 
CGMI’s customers were not provided with sufficient information to appreciate the dimension of 
the conflict of interest the revenue sharing program created.   

14. Beginning in July 2003, CGMI amended and began improving 
confirmation disclosures relating to its revenue sharing program.  In addition, CGMI requested 
that participating mutual fund complexes enhance their disclosures in their prospectuses and 
SAIs regarding revenue sharing payments.   

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 15. Based on the foregoing, CGMI willfully4 violated: 

a. Section 17(a)(2) of the Securities Act, which provides that it is “unlawful 
for any person in the offer or sale of any securities . . . by the use of any means or 
instruments of transportation or communication in interstate commerce or by use of 
the mails, directly or indirectly . . . to obtain money or property by means of any 
untrue statement of a material fact or any omission to state a material fact necessary 
in order to make the statements made, in light of the circumstances under which 
they made, not misleading;” and 

b. Rule 10b-10 under the Exchange Act, which provides in pertinent part that “it 
shall be unlawful for any broker or dealer to effect for or with an account of a 
customer any transaction in, or to induce the purchase or sale by such customer of, 
any security  . . . unless such broker or dealer, at or before completion of such 
transaction, gives or sends to such customer written notification disclosing . . . the 
source and amount of any other remuneration received or to be received by the 
broker in connection with the transaction.” 

16. Certain broker-dealers affiliated with CGMI, namely Citicorp Investment 
Services, PFS Investments, Inc. and Tower Square Securities Inc. (collectively the “Affiliates”), 
voluntarily reported through CGMI to the Commission staff that, during the relevant time period, 
they also had revenue sharing programs similar to CGMI’s program.5  Like CGMI, the Affiliates 
did not provide their FCs and branch managers with any increased payouts or cash bonuses in 
connection with their revenue sharing programs.  However, the programs varied, among other 
areas, in the number of tiers, the calculation of the payments and the access granted to the fund 
complexes participating in the programs.  In addition, the Affiliates received some revenue sharing 
payments in the form of directed brokerage from certain fund complexes in connection with their 
respective revenue sharing arrangements.6  The Affiliates, as did CGMI, relied on the participating 
fund complexes’ prospectuses and SAIs to satisfy their obligations with regard to their revenue 
sharing programs and did not provide any additional disclosures to their customers.  As noted 
above, these documents generally did not provide adequate disclosures to customers about the 
nature and scope of the revenue sharing programs. 

4 “Willfully” as used in the Order means intentionally committing the act which constitutes the 
violation, see Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000); Tager v. SEC, 344 F.2d 5, 
8 (2d Cir. 1965). There is no requirement that the actor also be aware that he is violating one of 
the Rules or Act.  Id. 

5 Like CGMI, the Affiliates are also subsidiaries of Citigroup, Inc. 

6 The receipt of such payments was substantially discontinued in 2001.   
5




 

 
 

 

 
 

 

  
 

                                                 
 

 

CGMI’s Sale of Class B Shares 

17. CGMI recommends mutual funds that issue different classes of shares, 
including Class A and Class B shares, which represent interests in the same portfolio of 
securities, but differ in the structure and amount of sales charges paid directly by shareholders 
and continuous, asset-based fees assessed on each shareholder’s account. 

18.      Class A shares are subject to a front-end load, or initial sales charge, when 
originally purchased, and have modest annual fund expenses, including 12b-1 fees that are 
typically 0.25 percent. The majority of the front-end load is paid to the selling broker-dealer as a 
commission.  The balance of the initial investment is paid for the fund’s shares. Typically, the 
front-end load decreases as the size of the investment increases.  This concept applies to both 
single purchases and to multiple purchases in the same family of funds that may be aggregated 
with the customer’s other investments, as well as investments by that customer’s household, as 
permitted by the funds' prospectuses.  For most investments in which the total dollar amount 
invested in a fund family is $1 million or more, the front-end load is generally waived.  These 
discounts are commonly referred to as “breakpoints” and the discounts typically increase at each 
of the $50,000, $100,000, $250,000, $500,000 and $1 million levels.  

19. For example, for CGMI’s affiliated proprietary funds, investments in 
Class A shares that, when aggregated, fall below $25,000 are subject to an initial sales charge 
that can range from 4.00 to 5.00 percent.  However, for an investment: (i) between $25,000 and 
$49,999 the sales charge can range from 3.50 to 4.25 percent; (ii) between $50,000 and $99,999 
the sales charge can range from 3.00 to 3.75 percent; (iii) between $100,000 and $249,999 the 
sales charge can range from 2.50 to 3.25 percent; (iv) between $250,000 and $499,999 the sales 
charge can range from 1.50 to 2.75 percent; (v) between $500,000 and $999,999 the sales charge 
can range from zero to 2.00 percent; and (vi) $1 million or more reduces the sales charge to zero.  
These breakpoints reduce the commissions paid to the selling broker-dealers by a corresponding 
amount.  Investors can receive the benefits of breakpoint discounts by, among other ways, 
making a single investment, aggregating purchases, employing rights of accumulation or 
utilizing letters of intent.7 

20. In contrast, Class B shares do not carry any front-end sales charge and do 
not have breakpoints regardless of the size of the investment.  To compensate for the absence of 
a front-end sales charge, Class B shares have significantly higher annual 12b-1 fees (typically 
1.00 percent) than Class A shares (typically 0.25 percent) and are subject to a contingent 
deferred sales charge (“CDSC”) if redeemed prior to the expiration of a holding period specified 

7  A right of accumulation permits an investor or an eligible group of related investors (e.g., the 
customer, the spouse and minor children) to “accumulate” or combine existing holdings of shares 
of a particular fund complex with additional purchases of shares of the same fund complex for 
the purpose of achieving breakpoints and associated discounts. Customers may also qualify for 
breakpoints by executing a letter of intent, which is an agreement to make multiple purchases of 
Class A shares issued by a fund family over a period of time, usually around 13 months, which, 
when aggregated, equal an amount that qualifies for a breakpoint discount. 

6
 



 

 
    

 
   

 
  

 
 

 
   

 
   

in the prospectus. The amount of the CDSC, generally calculated as a percentage of the lesser of 
the purchase price or the account’s value at the time of the sale, declines each year and 
eventually disappears entirely.  Class B shares usually convert to Class A shares, at no cost to the 
investor, generally after eight years.  

21. For investors, breakpoints and higher expenses generally have a direct and 
significant impact on a mutual fund investment’s return.  The significance of these differences is 
that, at certain dollar levels and holding periods, an equal investment in Class A shares, as 
opposed to Class B shares, may be in the best interest of the investor. 

22. With regard to Class B shares, the mutual fund distributor, which is 
generally an affiliate of the mutual fund, advances a commission to the selling broker-dealer. 
Because Class B shares do not offer breakpoint discounts, broker-dealers and their 
representatives receive greater commissions from the sale of Class B shares than from the sale of 
the same amount of Class A shares if the sale would qualify for breakpoint discounts.  Mutual 
fund complexes, through their distributors, recoup the commissions they advance for Class B 
shares through the substantially higher Rule 12b-1 fees and/or the CDSC.  The different fee 
structures, expenses and characteristics of Class A and Class B shares, including the availability 
of breakpoint discounts with regard to purchases of Class A shares, and the impact of CDSCs on 
investments in Class B shares, are described in the mutual fund prospectuses and SAIs. 

23. From January 1, 2002 through July 31, 2003, CGMI recommended and 
sold Class B shares of mutual funds to customers who, depending on the amount of the 
investment and the holding period, generally would have benefited had they purchased Class A 
shares instead. Specifically, these customers made purchases of Class B shares in various mutual 
funds which, had they purchased Class A shares, could have qualified for breakpoints beginning 
at the $50,000 level, through single purchases, aggregating multiple purchases, employing rights 
of accumulation or utilizing letters of intent.  As a result of the customers’ purchases of Class B 
shares, CGMI received greater commissions from these transactions than it would have earned 
had it sold Class A shares of the same mutual funds. 

CGMI’s Policies and Procedures Regarding Class B Shares 

24. CGMI had certain policies requiring FCs to disclose to customers certain 
information regarding Class B shares.  For example, the firm’s Mutual Fund Sales Practices 
Compliance Manual required FCs to disclose, among other things: (i) types of sales charges and 
fees; (ii) multiple classes of securities; (iii) options for reduced or waived sales charges 
(including breakpoints); (iv) multiple fund purchases; and (v) expense ratios.  More specifically, 
the manual required that FCs assist each customer in deciding which class of shares was likely to 
be most advantageous given the customer’s individual circumstances.   

25. Although CGMI had certain written policies requiring disclosures about 
the various classes of fund shares, CGMI’s procedures were not sufficient to ensure that FCs 
made such disclosures to their customers, other than providing them with prospectuses.  Among 
other things, FCs, when recommending and selling Class B shares of mutual fund shares to 

7
 



 

 
  

 

   
  

 

 
  

 

 
 

 
 

 

 

                                                 

customers, did not adequately disclose that: (i) such shares were subject to higher annual fees 
that could have a negative impact on the customers’ investment return, or (ii) once breakpoints 
become available beginning at the $50,000 level, an equal investment in Class A shares could 
yield a higher return. 

26. In July 2003, CGMI began to change its procedures with regard to the sale 
of mutual funds, including through the implementation of blocks on the sale of Class B shares 
where the customer would be in a more advantageous financial position by purchasing Class A 
shares. 

27. As a result of the foregoing, CGMI willfully8 violated Section 17(a)(2) of 
the Securities Act. 

28. In determining whether to accept CGMI’s Offer, the Commission has 
considered a related disciplinary action by the NASD involving CGMI’s sale of Class B shares 
during the same time period covered by the Order.  In its Acceptance, Waiver and Consent 
submitted to the NASD to resolve that matter, CGMI has agreed to pay to the NASD a fine of 
$6.25 million and to undertake certain remedial and corrective actions for the benefit of investors. 

29. CGMI has obtained corporate resolutions of the Boards of Directors of 
Citigroup, Inc. or an appropriate corporate parent of the Affiliates directing each of the Affiliates to 
comply fully with the undertakings in paragraph 30 below to the extent that such undertakings 
specifically apply to the Affiliates.  CGMI has also obtained a corporate resolution of the parent 
corporation directing that CGMI shall take all steps reasonable and necessary to obtain such 
compliance by the Affiliates.  All resolutions shall remain in effect until such time as CGMI has 
completed, and has ensured that the Affiliates have complied with, all such undertakings. 

Undertakings 

30. CGMI undertakes the following: 

a. CGMI shall place and maintain on its website, within 30 days from the date 
of entry of the Order, disclosures regarding its revenue sharing program to include, 
if applicable:  (i) the existence of the program; (ii) the fund complexes participating 
in the program; (iii) the maximum amount of payment that CGMI receives, 
expressed in basis points, in connection with the fund complexes’ participation in 
the program; and (iv) the source of such payments.  CGMI shall make this 
information available via a hyperlink on the home page of its website. CGMI shall 
also cause the Affiliates to take the same actions within 30 days from the date of 
entry of the Order. 

8 “Willfully” as used in the Order means intentionally committing the act which constitutes the 
violation, see Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000); Tager v. SEC, 344 F.2d 5, 
8 (2d Cir. 1965). There is no requirement that the actor also be aware that he is violating one of 
the Rules or Act.  Id. 

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b. CGMI shall retain, within 60 days from the date of entry of the Order, the 
services of an Independent Consultant, who is not unacceptable to the 
Commission’s staff.  CGMI shall require the Independent Consultant to perform all 
of the services and tasks as described below.  CGMI shall exclusively bear all costs, 
including compensation and expenses, associated with the retention and 
performance of the Independent Consultant.   

c. CGMI shall retain and shall require the Independent Consultant to conduct a 
comprehensive review of: (i) the completeness of the disclosures regarding CGMI’s 
Tier Program and the differences in mutual fund share classes; and (ii) the policies 
and procedures relating to CGMI’s recommendations to its customers of mutual 
funds in the Tier Program and of different class shares of mutual funds.  CGMI 
shall retain the Independent Consultant to recommend policies and procedures to 
ensure compliance with applicable statutory and regulatory requirements in these 
areas. 

d. CGMI shall, within 90 days from the date of entry of the Order, provide to 
the Independent Consultant a list of customers who purchased Class B shares 
between January 1, 2002 and the date of entry of the Order (the “relevant time 
period”), of $50,000 or greater, including, without limitation, through single and 
multiple purchases by the customer(s) and through aggregation by household9 and 
fund family of all purchases during the relevant time period. The list must include 
at least the customers’ names and contact information, any firm-based household 
identification number, the date, fund name, fund symbol and number of shares 
purchased, and the gross principal amount invested for every purchase.  Every 
purchase transaction on the list is a “Qualifying Purchase.”  However, Qualifying 
Purchases shall not include: 

(i)	 purchases of Class B shares for which customers have previously 
settled and signed releases of claims against CGMI;  

(ii)	 purchases of Class B shares which were later cancelled at no cost to 
the customer; 

(iii)	 purchases of Class B shares, which, when aggregated with other 
Class B share purchases by the same household in the same fund 
family, total less than $100,000, and for which the customer would 
have been charged a Class A share initial sales charge exceeding 
4.00 percent; 

9 “Household” includes all accounts that are related by at least two of the following three factors: 
(1) tax identification/social security numbers; (2) address; and (3) last or "key" name. 

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(iv)	 purchases of Class B shares, which, when aggregated with other 
Class B share purchases by the same household in the same fund 
family, total less than $100,000, and where the customer (1) entered 
into a systematic withdrawal plan at the time of the Class B share 
purchase, and immediately began receiving systematic withdrawals 
from the Class B share purchase without incurring CDSCs, or (2) 
chose not to reinvest all capital gains and dividends from the Class 
B share purchase; 

(v)	 purchases of Class B shares, which, assuming a 5 percent annual 
rate of return and considering all expenses, are projected to have a 
higher redemption value, determined as of the end of each year 
following the purchase date, in comparison to Class A shares in any 
two years during the period beginning with the effective date of the 
Order and ending on the date the Class B shares are scheduled to 
automatically convert to Class A shares under the terms of the fund 
prospectuses in effect at the time of the purchase; and 

(vi)	 purchases of Class B shares, which, assuming a 5 percent annual 
rate of return and considering all expenses during the relevant time 
period, are projected, as of the date of conversion, to have a value 
within $100.00 of the projected value of Class A shares had the 
customers purchased Class A shares instead of Class B shares.10 

e. Additionally, within 150 days from the date of entry of the Order, CGMI 
shall offer any customer who made a Qualifying Purchase(s) and still holds all 
such shares, the option of converting such Class B shares into Class A shares in 
such a manner that each customer is placed in the same financial position, based 
on actual fund performance, in which such customer would have been, as of the 
date no more than 10 business days prior to the date on which the offered 
conversion to Class A shares is to be completed, with respect to the Qualifying 
Purchase(s) had the customer purchased Class A shares instead of Class B shares 
(the “Settlement Plan”).  

f. The Independent Consultant, following consultation with CGMI, may 
further remove from the Settlement Plan additional Class B share purchases as 
long as the Independent Consultant provides CGMI and the Commission’s staff 
with quantitative proof that the customer could not materially benefit11 from 

10 In addition, the Qualifying Purchases shall not include purchases of Class B shares which 
would not have been eligible for breakpoints at or above specified thresholds in certain mutual 
funds as identified on a list to be provided to the Independent Consultant. 

11 The Settlement Plan shall provide that CGMI will not be required to offer a customer 
conversion if the customer would not materially benefit from an offer of conversion because 

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having the particular transaction converted to Class A shares and the removal of 
such Qualifying Purchase is not unacceptable to the Commission’s staff. 

g. The Settlement Plan shall also provide for the payment of cash, subject to 
each customer’s choice not to receive payment, to put those customers who made 
a Qualifying Purchase(s) and sold, prior to receipt of notice from CGMI, some or 
all of their Class B shares comprising the Qualifying Purchase(s) into the same 
financial position, based on actual fund performance and redemption value, when 
aggregating Qualified Purchases, in which such customers would have been had 
the Class B shares that were sold been invested in Class A shares instead. 

h. Under the Settlement Plan, each customer shall be entitled to breakpoints 
to the extent permitted by each relevant fund family based on all eligible 
holdings12 and applicable rights of accumulation and assuming letters of intent 
were utilized in accordance with the applicable prospectuses.  

i. In the event that any customer, who made a Qualifying Purchase(s), elects 
to convert those purchases to Class A shares from Class B, and CGMI is unable to 
effectuate such conversion for any reason, CGMI shall be required under the 
Settlement Plan to provide for the payment of cash, subject to each customer’s 
choice not to receive payment, to such customer in an amount that will place the 
customer in the same financial position, based on actual performance and 
redemption value, that such customer would have been in as of the date of entry 
of the Order had the customer made his Qualifying Purchase(s) in Class A shares 
instead of Class B. 

j. The Settlement Plan shall not be unacceptable to the Independent 
Consultant and the Commission’s staff.   

k. Additionally, as part of the Settlement Plan, within 120 days from the date 
of entry of the Order, CGMI shall submit to the Independent Consultant and the  
Commission’s staff for review sample letters in plain English: (i) offering each 
customer, according to the particular characteristics of their account and 
purchases, the opportunity to convert in accordance with the Settlement Plan 
and/or cash payment, subject to each customer’s choice not to receive payment, 

either the annual expense differential between Class A shares and Class B shares, the CDSC 
schedule, and/or the conversion year quantitatively are such that Class B shares may be 
substantially equal, or more appropriate, compared to Class A shares of the same fund, at 
particular investment levels.  

12 Eligible holdings means the balance of all investments permitted by the relevant fund family to 
be aggregated for applicable breakpoints at the time of the Qualifying Purchase, including 
investments made before and held at the time of, the Qualifying Purchase. 

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for any portions of Qualifying Purchases that have been sold; (ii) explaining the 
economic advantages and disadvantages to the customer of the options; and (iii) 
stating that the customer should consult with a tax advisor to determine whether 
the conversion carries any federal, state, or local tax consequences.  Such letters 
may include other factors that customers may reasonably rely upon when deciding 
whether to convert. The letter shall not be unacceptable to the Independent 
Consultant and the Commission’s staff.  

l. CGMI shall fully complete execution of the Settlement Plan within 270 
days from the date of entry of the Order.   

m. CGMI shall further retain and shall require the Independent Consultant to 
prepare and, within 150 days from the date of entry of the Order, submit to CGMI 
and the Commission’s staff an Initial Report.  The Initial Report shall address, at a 
minimum:  (i) the adequacy of the disclosures regarding CGMI’s revenue sharing 
program; (ii) the adequacy of CGMI’s disclosures of the differences in mutual fund 
share classes; (iii) the adequacy of the policies and procedures regarding CGMI’s 
recommendations and disclosures to its customers of mutual funds in its revenue 
sharing program; (iv) the adequacy of the policies and procedures regarding 
CGMI’s recommendations and disclosures to its customers of mutual fund share 
classes; and the (v) the adequacy of the Settlement Plan, with a goal toward placing 
CGMI customers who made Qualifying Purchases in the same financial positions 
they would have been had they purchased Class A shares instead of Class B shares.  
The Initial Report must include a description of the review performed, the 
conclusions reached, and the Independent Consultant's recommendations for 
policies and procedures to ensure compliance with all applicable statutory and 
regulatory requirements in these areas, an effective system for implementing the 
recommended policies and procedures and an effective system for establishing and 
maintaining written records that evidence compliance with the recommended 
policies and procedures.   

n. Within 180 days from the date of entry of the Order, CGMI shall in writing 
advise the Independent Consultant and the Commission’s staff of the 
recommendations from the Initial Report that it is adopting and the 
recommendations that it considers to be unnecessary or inappropriate. With respect 
to any recommendation that CGMI considers unnecessary or inappropriate, CGMI 
shall explain why the objective or purpose of such recommendation is unnecessary 
or inappropriate and provide in writing an alternative policy, procedure or system 
designed to achieve the same objective or purpose.  

o. With respect to any recommendation with which CGMI and the 
Independent Consultant do not agree, CGMI shall attempt in good faith to reach an 
agreement with the Independent Consultant within 210 days from the date of entry 
of the Order.  In the event the Independent Consultant and CGMI are unable to 

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agree on an alternative proposal not unacceptable to the Commission’s staff, CGMI 
shall abide by the recommendation of the Independent Consultant. 

p. CGMI shall further retain and shall require the Independent Consultant to 
complete the aforementioned review and submit a written Final Report to CGMI 
and to the Commission’s staff within 270 days from the date of entry of the Order. 
The Final Report must recite the efforts the Independent Consultant undertook to 
review: (i) CGMI’s disclosures regarding its revenue sharing program; (ii) CGMI’s 
disclosures regarding the differences in mutual fund share classes; (iii) the policies 
and procedures regarding CGMI’s recommendations of the mutual funds in its 
revenue sharing program; (iv) the policies and procedures regarding CGMI’s 
recommendations and disclosures to customers of multi-class mutual funds; and (v) 
the procedures to administer the Settlement Plan and the completeness of the 
implementation of the Settlement Plan.  The Final Report shall also set forth in 
detail the Independent Consultant's recommendations and a reasonable time 
period(s), not to exceed 300 days from the date of entry of the Order, for CGMI to 
implement its recommendations.  The Final Report must also describe how CGMI 
proposes to implement those recommendations within the time period(s) set forth in 
the Final Report. 

q. CGMI shall take all necessary and appropriate steps to adopt and implement 
all recommendations and proposals contained in the Independent Consultant's Final 
Report. In addition, CGMI shall cause the Affiliates to implement all of the 
recommendations and proposals relating to revenue sharing contained in the 
Independent Consultant's Final Report, as applicable. 

r. CGMI shall further retain and shall require the Independent Consultant to 
conduct a follow-up review of CGMI's efforts to implement each of the 
recommendations contained in the Independent Consultant's Final Report, as 
applicable. This follow-up review shall be completed no later than 360 days from 
the date of entry of the Order.  As part of the follow-up review process, CGMI shall 
retain and shall require the Independent Counsel to submit a follow-up report to the 
Commission’s staff no later than 375 days from the date of entry of the Order.  The 
follow-up report must set forth the details of CGMI's and the Affiliates’ efforts to 
implement each of the recommendations contained in the Final Report, and must 
separately state whether CGMI and the Affiliates have fully complied with each of 
the recommendations in the Final Report, as applicable.   

s. To ensure the independence of the Independent Consultant, CGMI:  (i) shall 
not have the authority to terminate the Independent Consultant, without the prior 
written approval of the Commission’s staff; (ii) shall compensate the Independent 
Consultant, and persons engaged to assist the Independent Consultant, for services 
rendered pursuant to the Order at their reasonable and customary rates; and (iii) 
shall not be in and shall not have an attorney-client relationship with the 
Independent Consultant and shall not seek to invoke the attorney-client or any other 

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doctrine or privilege to prevent the Independent Consultant from transmitting any 
information, reports or documents to the Commission or the Commission’s staff. 

t. To further ensure the independence of the Independent Consultant, for the 
period of the engagement and for a period of two years from completion of the 
engagement, CGMI, its present or former affiliates, directors, officers, employees, 
and agents acting in their capacity shall not enter into any employment, consultant, 
attorney-client, auditing or other professional relationship with Independent 
Consultant. Further, CGMI, its present or former affiliates, directors, officers, 
employees, and agents acting in their capacity shall not enter into any employment, 
consultant, attorney-client, auditing or other professional relationship with any firm, 
with which the Independent Consultant is affiliated in performance of his or her 
duties under the Order, or agents acting in their capacity, for the period of the 
engagement and for a period of two years after the engagement without prior 
written consent of the Commission’s staff. 

u. CGMI shall cooperate fully with the Independent Consultant and shall 
provide the Independent Consultant with prompt access to CGMI’s and the 
Affiliates’ files, books, records and personnel as the Independent Consultant 
reasonably deems necessary or appropriate in fulfilling any function or completing 
any task described in these undertakings. 

v. For good cause shown, and upon receipt of a timely application from the 
Independent Consultant or CGMI, the Commission's staff may extend any of the 
procedural dates set forth above. 

IV. 

In view of the foregoing, the Commission deems it appropriate, in the public interest, and 
for the protection of investors, to impose the sanctions agreed to in CGMI’s Offer. 

Accordingly, pursuant to Section 8A of the Securities Act and Sections 15(b) and 21C of 
the Exchange Act, it is hereby ORDERED that: 

1. CGMI shall cease and desist from committing or causing any violations and any 
future violations of Section 17(a) of the Securities Act and Rule 10b-10 under the Exchange Act;  

2. CGMI is censured;  

3. CGMI shall, within 30 days from the date of entry of the Order, pay a civil money 
penalty in the amount of $20 million to the United States Treasury.  Such payment shall be: (A) 
made by United States postal money order, certified check, bank cashier's check or bank money 
order; (B) made payable to the Securities and Exchange Commission; (C) hand-delivered or 
mailed to the Office of Financial Management, Securities and Exchange Commission, Operations 

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Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (D) submitted under cover 
letter that identifies CGMI as a Respondent in these proceedings, the file number of these  
proceedings, a copy of which cover letter and money order or check shall be sent to Arthur S. 
Gabinet, Securities and Exchange Commission, Mellon Independence Center, 701 Market St., 
Suite 2000, Philadelphia, PA  19106;  and 

4. CGMI shall comply with the undertakings enumerated in Section III.30. above. 

 By the Commission. 

       Jonathan  G.  Katz
       Secretary  

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