SEC Commissioner Objects to “Lenient” Citigroup Treatment

Citigroup

The Securities and Exchange Commission has relaxed a rule that now allows Citigroup Inc (NYSE:C) to sell hedge fund investments to sophisticated wealthy investors.  The move comes despite the SEC finding finding that Citigroup violated anti-fraud provisions of U.S. securities laws and is drawing criticism from a reform-minded SEC commissioner.

Citigroup retains special status for marketing hedge funds

In addition to providing Citigroup Inc (NYSE:C) more flexible standards in marketing hedge funds, the bank also retained special status as what is known as a “well-known seasoned issuer,” or WKSI, according to a report in The Wall Street Journal. Such “well-known” status allows Citigroup involvement in issuing stocks and bonds without a review by the SEC, implying a degree of trust that the firm will comply with regulations.

Providing the bank both exemptions after the firm admitted to fraud charges isn’t sitting well with SEC Commissioner Kara Stein, a vocal critic of regulatory policy that appears to provide large banks the benefit of a double standard.  In a recent SEC vote, Stein dissented on the issue, claiming large financial institutions have benefited from lenient regulatory treatment, the Journal reported, citing an unnamed source.

Kara Stein’s disagreement with Mary Jo White

On multiple occasions, Stein disagreed with the SEC and accused the agency of being too lenient on the largest financial institutions. As previously reported in ValueWalk, Stein has even butted heads with fellow Democrat Mary Jo White, the SEC Chairwoman, on issues of undue leniency towards the most powerful financial institutions

“Our website is replete with waiver after waiver for the largest financial institutions,” Ms. Stein said after objecting to a well-known- seasoned-issuer waiver for Royal Bank of Scotland Group plc (ADR) (NYSE:RBS) (LON:RBS). As reported in the Journal, RBS had reached a $612 million settlement with U.S. and U.K. regulators over allegations that traders at the bank tried to rig interbank lending rates.

At one point, rigging markets was considered among the highest crimes and participants in such activity were shunned or regulated out of the industry.  In today’s looser regulatory environment, what was once considered criminal and harshly punished – think Hunt brothers cornering the silver market, for instance – now appears to be permissible for select Wall Street firms. When she warned about the commission’s decision to overturn Royal Bank of Scotland Group plc (ADR) (NYSE:RBS) (LON:RBS)’s disqualification, Stein worried about the precedent it set, saying it  “may have enshrined a new policy—that some firms are just too big to bar.”

“Our website is replete with waiver after waiver for the largest financial institutions,” Ms. Stein said at the time, warning the commission’s decision to overturn RBS’s disqualification “may have enshrined a new policy—that some firms are just too big to bar.”

Read the full Wall Street Journal article here.

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About the Author

Mark Melin
Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com

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