Sept. 18 (Bloomberg) -- Citigroup Inc., owner of the Smith Barney securities brokerage, lost exclusive rights to market Legg Mason Inc. funds after sales declined.

The distribution agreement dates back to December 2005, when Legg Mason swapped its brokerage unit for New York-based Citigroup's investment division. Investors pulled $7 billion from the company's stock funds in the second quarter as some returns trailed rivals.

Under new terms, Legg Mason may now sell to institutions and financial advisers through other brokers. Smith Barney will remain the sole source for Legg Mason's retail funds, the Baltimore-based money manager said today in an announcement to employees.

The new agreement allows ``each firm to pursue its goals while preserving our very important relationship,'' Mark Fetting, a Legg Mason senior executive vice president, said in the internal announcement.

Legg Mason's best-known fund, Bill Miller's Legg Mason Value Trust, fell 0.7 percent this year, lagging behind 91 percent of rival funds that invest in companies deemed inexpensive based on measurements such as earnings, according to data compiled by Bloomberg. Miller's 15-year streak of beating the Standard & Poor's 500 Index ended in 2006.

Investors have deposited $5.4 billion into Legg Mason's funds during the first seven months of 2007, according to Boston-based Financial Research Corp. That compares with $49.6 billion in deposits for Vanguard Group of Valley Forge, Pennsylvania, the best-selling mutual-fund firm this year.

Sixth-Largest Manager

The acquisition of Citigroup's fund unit helped transform Legg Mason from a regional brokerage into the sixth-largest U.S. asset manager. The company had $992 billion in assets under management as of June 30.

Legg Mason shares rose $2.90, or 3.7 percent, to $82.10 at 4:25 p.m. in New York Stock Exchange composite trading. They have fallen 14 percent this year, the most among the 14 members of the Standard & Poor's Asset Management and Custody Bank Index.

Citigroup shares gained $2.34, or 5.1 percent, to $48.37. They have declined 13 percent in 2007, compared with a drop of 5.4 percent by the S&P 500 Financials Index.

To contact the reporter on this story: Sree Vidya Bhaktavatsalam in Boston at sbhaktavatsa@bloomberg.net;

Last Updated: September 18, 2007 19:21 EDT