Citigroup’s $285 million mortgage-backed securities settlement has cut it out of the hedge-fund sales business, at least for the time being.
Under the Securities and Exchange Commission’s new “bad actor” rule, adopted last year, firms with “a relevant criminal conviction, regulatory or court order or other disqualifying event” are barred from participating in private offerings. That means that Citi isn’t allowed to sell hedge-fund or private-equity investments to high-net worth clients, although it can still arrange sales to large institutions.
Citi has told hedge funds over the last two weeks of the new restrictions. Prior to the Aug. 5 approval of its settlement, it had offered access to about 40 hedge funds, including Och-Ziff Capital Management, to clients of its private bank.
Citi will require a waiver from the SEC to resume those sales, The Wall Street Journal reports, a process that could take time—and that could run into opposition from some on the commission.
Other banks that have reached similar deals with regulators are not covered by the provision because they finalized their settlements prior to the bad-actor rule’s adoption. But Citi’s settlement, which it reached in 2011, was initially rejected by U.S. District Judge Jed Rakoff, who said it did not go far enough. Rakoff was reversed on appeal, forcing him to approve the deal earlier this month.
But by initially rejecting the settlement, Rakoff inadvertently gave it more teeth by delaying its approval until after the bad-actor rule had come into effect.