Citigroup Settles With SEC Over Fund Fees

Citigroup Inc. agreed Tuesday to pay $208 million to settle regulators’ claims that it pocketed fees that should have been passed on to its mutual funds.

The settlement with the Securities and Exchange Commission wraps up part of a probe that Citigroup disclosed in 2003. Citigroup Global Markets and Smith Barney Fund Management were accused of misrepresenting and omitting facts when recommending to the mutual funds’ boards that they change to a transfer agent that was a Citigroup affiliate, the SEC said.

Mutual funds pay transfer agents to perform administrative services. A fund’s advisory company recommends to directors which transfer agents to hire and how much to pay them.

In this case, Citigroup units recommended that the mutual funds contract with an affiliate of the parent to serve as transfer agent, without fully disclosing to fund directors that most of the work would be done under a subcontract with the funds’ existing third-party transfer agent -- and at steeply discounted rates.

Rather than passing the substantial fee discount on to the funds, the advisors, through the affiliated transfer agent, took most of the benefit of the discount for themselves, the SEC said. Citigroup reaped nearly $100 million in profit at the funds’ expense over a five-year period, the agency said.

Citigroup didn’t admit or deny wrongdoing.

“The first rule for mutual fund advisors is that they must act in the best interest of their shareholders,” Mark Schonfeld, the head of the SEC’s New York office, said. “Here, the advisor put its interest in making a profit above its duty to get the best deal possible for its mutual funds.”

Citigroup, which set aside $196 million to settle the case last year, said Thomas Jones, former head of its investment management unit, and two others who weren’t identified could face civil action. The SEC said an investigation of “the individuals involved” was continuing.

As part of the settlement, when a Citigroup affiliate submits a proposal to serve as transfer agent for the company’s mutual funds, the advisor must seek competitive bids.

“Our most important mission is to assure our clients that their assets are secure in our care and that they can trust us to manage them with their interests at the forefront,” said Robert B. Willumstad, president of Citigroup. “We recognize that aspects of the transfer agency arrangements entered into six years ago did not reflect the way we think business should be done, and that is unacceptable.”

Citigroup shares fell 17 cents to $47.11.