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Citigroup reportedly planning to settle US investigations

Citigroup Inc is in talks with US regulators to settle conflict-of-interest investigations by separating the bank's research and investment banking businesses, people familiar with the matter said.

The world's biggest financial services company was set to probably propose the division and payment of a fine in talks yesterday with the Securities and Exchange Commission, NASD and New York Stock Exchange, a person familiar with the plan said.

Regulatory probes contributed to a 37 percent drop in Citigroup shares this year.

The fine might reach several hundred million dollars, the Wall Street Journal reported, citing people familiar with the matter. Proposals include a complete spin-off of research or the establishment of a separate unit within the company, it said.

Separating underwriting and advisory work from research, used by many firms to win banking business, would set new standards on Wall Street.

Regulators are examining whether Citigroup won tens of millions of dollars in fees by writing favorable research on clients such as WorldCom Inc and allocating stock from initial public share sales to their executives.

"If you separate research from investment banking, that's going to make the regulators happy and it's going to be positive for the stocks," said Mark Bronzo, who helps manage US$2 billion for Groupama Asset Management.

"It makes a lot of sense. The only problem is how does research generate revenue?"

Banks provide research to investors primarily on publicly traded companies, offering stock and bond recommendations that can generate brokerage commissions.

Salomon Smith Barney, Citigroup's investment-banking unit, has more than 375 research analysts in the US, covering 2,800 companies, funds, trusts and fixed-income securities, according to the firm's Web site.

Banks say they have compliance in place to separate the work of bankers and analysts, often referred to as "Chinese Walls." Access passes typically can't be used to gain entry to each other's offices and compliance officials are often present when bankers and analysts hold meetings.

As part of the proposed Citigroup settlement, the function of allocating shares from initial stock sales may be taken away from the investment bankers who manage the sales, a person familiar with the matter said.

The proposal, if agreed to by all parties, might serve as a model for SEC settlements with other firms under investigation, the person said.

"It's one of the steps necessary for the average investor to start having confidence in research analysts again and Wall Street as a whole," said Diane Garnick, who manages US$770 billion at Global Investment Strategist for State Street Global Advisors.

"It will also help us attract people to research, whose focus is on integrity and not on pay."
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