The Miami-based firm would be the first to fight the SEC over any allegations of untracked communications. As a hedge fund, it would likely argue that it's not subject to the same rules as Wall Street banks like J.P. Morgan Chase & Co. and Bank of America, which agreed to pay more than $2.5 billion to settle U.S. regulators' investigations into their employees using unofficial messaging platforms for business.
"Citadel takes seriously its obligation to comply fully with the SEC's investment adviser rules and regulations, including those concerning the proper monitoring and record keeping of our employees' business-related communications," the company said in an emailed statement.
The SEC declined to comment.
Bloomberg reported in February that Citadel was under SEC investigation for alleged unmonitored communications, though the agency has yet to formally move against the fund and could ultimately decide against bringing an action. The threat of drawn-out litigation raises the stakes for the regulator and risks a court loss that may weaken its authority in this area.
Under SEC rules, many institutions have to save their business communications. This helps regulators root out fraud and misconduct in the markets. The agency's investigators have found that many bankers were communicating with each other on personal mobile phones — and that those records weren't being saved. As of August, 23 firms were sanctioned by the SEC for the practice.
The probe has widened to include private equity and hedge funds. Earlier this year, the agency asked for records from the phones of senior employees at Citadel and Steve Cohen's Point72 Asset Management, in some aspects going beyond what was asked of banks, Bloomberg reported in February.
Citadel hasn't heard from the SEC since April and hasn't received any notice from the regulator that it intends to bring an action against the firm, according to one of the people familiar with the matter.
The agency asked the hedge fund to survey the text messages of about 10 employees, the person said. It requested that any business-related texts — including emojis, when applicable — sent by those employees be given to the SEC, the person said.
The banks that settled with the SEC were brokers, subject to strict record-keeping rules. Citadel isn't a broker. The firm, which moved its headquarters from Chicago to Miami last year, is registered as an investment adviser with the SEC.
This subjects the hedge fund to a different set of record-keeping rules under which industry groups argue the SEC isn't entitled to broad access to their phones.
"The regulations, as written, do not require investment advisers to preserve all business communications," executives from 10 trade associations wrote to Gensler in January. The letter's lead author is Jennifer Han, chief counsel of the Managed Funds Association.
