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SYDNEY, Apr 9 (Reuters) Australia's corporate watchdog said it was not seeking to fundamentally change the way investment banks operate or ban proprietary trading in the wake of allegations of insider trading against Citigroup Inc.

The Australian Securities and Investments Commission (ASIC) last month said a subsidiary of the largest U.S. bank engaged in insider trading on a A$4.6 billion ($3.3 billion) bid by transport group Toll Holdings Ltd. for rival Patrick Corp. Ltd.

Citigroup Global Markets Australia Pty. Ltd. denied any wrongdoing. It had advised Toll, Australia's biggest logistics company, on the offer for Patrick last year.

''There's been suggestion for example, we're seeking to ban or outlaw proprietary trading -- that's not the case at all. We don't have any difficulties per se with proprietary trading,''ASIC Chairman Jeff Lucy told ABC television on Sunday.

''However, all financial institutions, including merchant banks, have an obligation to manage their conflicts of interest...if you don't meet that obligation, in our view, you break the law.'' ASIC said it identified substantial proprietary trading in Patrick shares by Citigroup's own accounts on Aug. 19, the last business day before Toll announced its bid on Aug. 22.

($1=A$1.37) REUTERS CS GC1253