Citadel Takes Defiant Stance against SEC's WhatsApp Probe, Prepared for Legal Battle

Citadel is gearing up to contest the Securities and Exchange Commission's (SEC) inquiry into WhatsApp communications, adopting a more assertive stance than the nearly two dozen banks that have previously settled with substantial fines in the past two years.

Key takeaways from Citadel Stance

  • Citadel plans to contest the SEC's inquiry into WhatsApp communications more assertively than banks that settled with fines.
  • Citadel might argue it falls under different regulatory jurisdiction compared to traditional banks like J.P. Morgan and Bank of America.
  • The SEC has not commented on the matter or formally initiated action against Citadel.
  • Private equity firms and hedge funds like Citadel have come under scrutiny, with phone record requests made.
  • The SEC asked Citadel to review text messages of about ten employees and provide relevant business-related texts.
  • Citadel, not categorized as a broker, follows distinct record-keeping rules as an investment adviser, limiting SEC access rights.
  • A letter from ten trade associations in January asserted that regulations don't require investment advisers to preserve all business communications, authored by Jennifer Han, Chief Counsel of the Managed.

Ken Griffin's hedge fund has informed its industry peers of its intentions to resist the SEC should the regulatory body take action against Citadel. Individuals with knowledge of the discussions revealed that Citadel is even prepared to pursue a legal battle against the agency, though they preferred to remain anonymous due to the confidential nature of the conversations.

Notably, this Miami-based firm would become the first entity to confront the SEC regarding allegations of unmonitored communications. Given its status as a hedge fund, Citadel is likely to argue that it does not fall under the same regulatory jurisdiction as traditional Wall Street banks such as J.P. Morgan Chase & Co. and Bank of America. These banking giants had previously agreed to settlements exceeding $2.5 billion to resolve U.S. regulators' inquiries into their employees' use of unofficial messaging platforms for business purposes.

Citadel released a statement via email, stating, "Citadel takes its obligation to fully comply with the SEC's investment adviser rules and regulations seriously, including those related to the proper monitoring and record-keeping of our employees' business-related communications."

The SEC refrained from providing comments on the matter.

In February, Bloomberg initially reported that the SEC was investigating Citadel for alleged unmonitored communications. However, as of now, the agency has not formally initiated any action against the hedge fund and may ultimately decide against pursuing a case. The potential for protracted litigation elevates the stakes for the regulator and introduces the risk of a court defeat that could diminish its authority in this domain.

SEC regulations mandate that numerous financial institutions must retain records of their business communications. This requirement serves to aid in uncovering fraudulent activities and misconduct within financial markets. SEC investigators have discovered that many bankers were using personal mobile phones for business communication, and these records were not being preserved. By August, the SEC had sanctioned 23 firms for this practice.

The scope of the investigation has expanded to encompass private equity firms and hedge funds. Earlier in the year, the SEC requested phone records from senior employees at both Citadel and Steve Cohen's Point72 Asset Management, sometimes requesting more extensive information than was sought from banks, as reported by Bloomberg in February.

According to one of the individuals familiar with the matter, Citadel has not received communication from the SEC since April and has not been formally notified of any impending action by the regulatory agency.

The SEC asked the hedge fund to review the text messages of approximately ten employees. They requested that any business-related texts, including emojis when relevant, sent by these employees be provided to the SEC.

It's essential to note that Citadel is not categorized as a broker, unlike the banks that settled with the SEC, which are subject to stringent record-keeping regulations. Citadel, which relocated its headquarters from Chicago to Miami the previous year, is registered as an investment adviser with the SEC. Consequently, the hedge fund adheres to a distinct set of record-keeping rules, under which industry associations contend that the SEC does not possess broad access rights to their phone records.

In a letter to Gensler in January, executives from ten trade associations asserted, "The regulations, as written, do not require investment advisers to preserve all business communications." The letter's primary author is Jennifer Han, the chief counsel of the Managed Funds Association.

Source: Pensions&Investments

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