The NASD's announcement of a censure and fine against Citigroup, the nation's largest financial institution, came a day before the Securities and Exchange Commission is expected to mandate new oversight for hedge funds - largely unregulated investment pools traditionally for the wealthy that have become more popular with small investors.

The high-risk, potentially high-return funds have an estimated $750 billion to $1 trillion in assets and are growing, and oversight is needed to head off potential blowups that could hurt ordinary investors, SEC officials contend.

The amount of the fine against Citigroup Global Markets Inc., a division of Citigroup, is small but the NASD, which is the brokerage industry's self-policing organization, said it was its largest enforcement action involving sales of hedge funds by a brokerage firm. More than 100 pieces of sales literature distributed by Citigroup between July 1, 2002 and June 30, 2003 touted rates of return of 12 percent to 15 percent a year "without providing a sound basis for evaluating the target" and failed to adequately disclose the potential risks of the investments, the NASD said.

"As hedge funds and 'funds of hedge funds' are marketed more and more aggressively to individual investors, ensuring that those investors receive full and accurate information is critical," NASD vice chairman Mary Schapiro said in a statement. "This enforcement action underscores our commitment to making certain that firms provide the investing public with a sound basis for evaluating hedge fund investments, and adequately disclose all of the risks."

Citigroup neither admitted to nor denied the allegations in its settlement with the NASD. Its brokerage subsidiary, Smith Barney, issued a statement saying that the company "took immediate action and cooperated fully with the NASD to ensure all materials comply with current NASD guidance."

News of the NASD's action followed a difficult week for Citigroup. In two separate cases, Citigroup removed three senior New York-based executives in the wake of a banking scandal in Japan and it disclosed that the SEC's staff was considering recommending civil charges against two former employees and a current employee. The possible SEC charges involve the creation and operation of an internal transfer agent unit to mainly serve the Smith Barney family of funds.

The SEC has taken a series of enforcement actions against hedge funds. The agency says it has seen an increase in fraud among the 5,700 or so hedge funds in the United States and has brought 40 enforcement cases in the last five years. But the SEC can only act after investors have lost money.

In July, the SEC commissioners voted 3-2 to propose the new rule ordering most hedge fund managers to register with the agency. If formally adopted on Tuesday as expected, the rule will open the funds' books to SEC examiners and make them subject to an array of regulations including accounting and disclosure requirements. The agency could, for example, conduct inspection "sweeps" of groups of hedge funds, something it now lacks legal authority to do.

Monday on the New York Stock Exchange, Citigroup shares rose 2 cents to close at $42.58, near its 52-week low.

-- Marcy Gordon