Citigroup Dealing With “Bad Actor” Restrictions on Hedge Fund Sales

Citigroup Dealing With “Bad Actor” Restrictions on Hedge Fund Sales

According to an August 22nd article in the Wall Street Journal, Citigroup Inc (NYSE:C) is facing “bad actor: restrictions relating to its recent settlement with U.S. regulators. The restrictions prevent the bank from selling investments in hedge funds and private-equity funds to individual clients, but do not prevent the sale of private investments to other larger banks.

The bank did not mention the restrictions when the settlement with the SEC was initially announced. The curbs on hedge fund-related activities derive from a settlement between Citigroup Inc (NYSE:C) and the Securities and Exchange Commission related to the earlier sale of certain mortgage debt products.

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The restrictions on Citigroup are partly due to timing and the bank’s decision to delay making a settlement. The other major banks involved in the mortgage derivatives scandal who reached similar settlements managed to avoid the curbs because they settled before a change in the law that came into effect in late 2013.

Citigroup private bank offering hedge funds

Apparently the matter became public as Citigroup Inc (NYSE:C) has recently been sending letters to hedge-fund firms informing them that they can no longer refer investors to their funds. Citigroup wrote in the letter that it’s working with regulators to resolve the issue. Regulations require the SEC to issue a waiver to permit the bank to resume hedge-fund sales to individual clients.

Citigroup’s private bank has been offering around 40 hedge funds to wealthy clients, including a hedge fund operated by Och-Ziff Capital Management Group LLC (NYSE:OZM). The private bank has more than $310 billion under management, and clients must have a net worth of at least $25 million.

Bad actor rule

The SEC’s new “bad actor” rule came into force about a year ago. The rule prevents an entity with “a relevant criminal conviction, regulatory or court order or other disqualifying event” from participating in a private offering.

The agency finalized the rule before Citigroup Inc (NYSE:C)’s settlement received final approval, so the bank was subject to the rule. The other banks reaching settlements with the SEC saw their agreements approved before last year’s bad-actor rule went into effect, which means they don’t have to deal with the same private-securities restrictions.

Moreover, the bank’s effort to obtain a waiver will probably require at least a few more months, according to the WSJ’s SEC source.

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