Yesterday the penalties of the settlement between Citigroup Inc (NYSE:C) and the United States Securities and Exchange Commission were announced to investors and the general public. The settlement was approved earlier this month on August 5^th, and was in regards to claims involving the bank’s previous sale of select debt products.

This set back for the bank is partially a result of the timing of the settlement. Other banks who faced similar settlements were able to avoid these restrictions because their settlements occurred before a modification in regulations last year.

For the last two weeks, Citigroup has been writing to hedge fund businesses to inform them that the bank is no longer able to guide investors towards their funds. In the letter, the bank explained that it is cooperating with the SEC to solve the issue. Under government regulations, the SEC must first issue a waiver before Citigroup can resume hedge fund sales to its clients.

Currently, Citigroup has been providing a total of 40 hedge funds to the clients of its private bank. One of these hedge funds is one that is managed by Och-Ziff Capital Management. Citigroup’s private bank controls $310 billion, and its clients are required to each have a net worth of $25 million or greater.

The bank is still allowed to sell private investments to large institutions.

The restriction is a result of more investors focusing on hedge funds and other alternative investments. These alternative investments are viewed by experts in the industry as a method to safeguard against potential losses when the stock market swings to its high points. By selling hedge funds and other alternative investments to wealthy clients and institutions, banks and other financial firms are increasingly seeing the benefits that these sales could yield.

According to Ken Heinz, the president of HFR, selling funds to investors is a growing space. Money from wealthy families and individuals make up about 26 percent of the $2.8 trillion invested in hedge funds. This figure has grown 20 percent from last year.

These restrictions imposed on Citigroup result from a settlement between Citigroup and the Securities and Exchange Commission involving the bank’s sale of specific collateralized debt obligations to its clients in 2006 and 2007. In 2011, the settlement was reached to be $285 million, but Jed Rakoff, the presiding judge over the case of the U.S. District Court in Manhattan, initially rejected the deal on the basis that the terms were too small for a business as large as Citigroup. On August 5^th of this year, right after the reversal of that initial ruling by the Second U.S. Circuit Court of Appeals, the settlement was approved by Judge Rakoff.

The “bad actor” law adopted by the SEC a little over a year ago, limits the party with a applicable criminal conviction, regulatory order, court order, or another disqualifying even, from engaging in private offering. This law was adopted as a part of the 2010 Dodd-Frank regulatory overhaul of the SEC.

Since the government agency passed the new rule before Citigroup’s settlement reached its final approval, that means that the bank is now subject to additional limits. Other banks that had reached their settlements in the past few years mostly had their deals approved before the bad actor law went into effect. Thus, those banks did not have to face the limitations that Citigroup is dealing with right now.

The bank has file for a waiver, but it will most likely require more time to review after the changes made to the regulations last year. The waiver will be granted to Citigroup if the SEC sees it as being in the best interest for the public. Citigroup will be allowed to conduct business as usual if it receives the waiver.

In most requests for waivers, companies often claim that the activities that involve the waiver aren’t even directly related to the activities noted in the settlements, and thus shouldn’t be limited.

Some experts within the SEC, such as Democratic commissioner Kara Stein, have protested issuing waivers for repeat offenders of the law.

Stein said that the bad actor policies are certainly able to reprimand large institutions for their mistakes. However, by repeatedly issuing waivers to the companies, it negates the consequences of the firms’ errors.

Citigroup has reached settlements with the government before, such as a $7 billion deal last month to settle the United States government’s claims that it was aware of the sale of defect mortgages prior to the economic crisis.

Followng the original settlement three years ago, Citigroup has been permitted to sell these investments to clients. However, the bank was forced to stop when the settlement was approved earlier in August. The bank is doing due diligence on these funds and has been charging fees for putting clients in the funds.

In the past few years, Citigroup has terminated many aggressive trading operations, and closed or modified businesses that managed private equity funds and hedge funds. However, it has continued the sale of funds that are operated by other entities to clients of Citigroup.

In 2013, Citibank finished the spin off of its hedge fund strategies unit Citi Capital Advisors into an entity owned by management, called Napier Park Global Capital. According to Citigroup, this move was done to make sure the company would comply with the Dodd-Frank regulations.

A component of the law is the Volcker rule, which prevents banks from owning more than 3% of a private equity firm or a hedge fund. Citigroup set up another hedge fund that it had managed before, and has since transferred the ownership of Citi Venture Capital International to a third party. Citi Venture Capital International is a private equity firm for emerging markets.

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