Quiver Quantitative - Citadel, Ken Griffin's prominent hedge fund, is gearing up for a potential showdown with the Securities and Exchange Commission (SEC) over a WhatsApp communications probe. While numerous banks have already settled with the SEC over similar concerns, Citadel has informed its industry peers of its intent to challenge any regulatory action, potentially taking the matter to court. The primary bone of contention hinges on Citadel's belief that as a hedge fund, it isn't subject to the same regulations as Wall Street banks, which have paid billions in settlements over unofficial messaging platform usage. The SEC's broader agenda includes examining the private funds market and reevaluating trading regulations, with the ongoing probe into unmonitored communications forming just one part of its expansive review.
Under the leadership of Chair Gary Gensler, the SEC has intensified its scrutiny of the private funds market, valued at $26 trillion, leading to increased tensions between the regulator and financial institutions. These conflicts span various domains, from cryptocurrency to stock-market rules. Most notably, the SEC has proposed changes to U.S. trading regulations that would impact Citadel Securities, another entity within Griffin's portfolio. At the heart of the issue is the SEC's directive for many institutions to retain their business communications, ensuring fraudulent activities are easier to detect.
Citadel's contention is founded on its status. Unlike the banks which have settled with the SEC, Citadel operates not as a broker but as an investment adviser. This categorization places it under a distinct set of recordkeeping regulations. According to several trade associations, the current regulations do not mandate investment advisers to conserve all business-related communications. The SEC's ongoing probe has expanded to involve private equity and hedge funds, with requests being made for phone records from senior executives at firms including Citadel and Point72 Asset Management.
Given Citadel's vast resources, with over $60 billion under management and a team of securities attorneys, it is well-positioned to challenge the SEC. However, both parties stand to face considerable risks if the dispute proceeds to court. For Citadel, an unfavorable ruling could result in substantial fines, setting a precedent that might concern other industry participants. On the other hand, a court victory for Citadel might limit the scope of future SEC actions against private equity and hedge funds over similar communication concerns and could potentially restrict the kind of messaging records investment advisers need to maintain.
This article was originally published on Quiver Quantitative