The Securities and Exchange Commission (“SEC”) has proposed to extend temporary Rule 206(3)-3T under the Investment Advisers Act of 1940 (the “Advisers Act”) from December 31, 2014 until December 31, 2016. Rule 206(3)-3T establishes an alternative means for registered investment advisers that are also registered as broker-dealers (“Dual Registrants”) to meet the requirements of Section 206(3) of Advisers Act when they act in a principal capacity in transactions with certain advisory clients.
Section 206(3) under the Advisers Act prohibits registered investment advisers from engaging in principal transactions with their clients unless they obtain prior written consent for each individual principal transaction. As a practical matter, this requirement effectively prohibits investment advisers from engaging in principal trades with their clients. However under Rule 206(3)-3T, a Dual Registrant may trade on a principal basis with non-discretionary advisory accounts if, among other things:
(i) the Dual Registrant discloses the circumstances under which it may engage in principal transactions;
(ii) the advisory client executes a written consent prospectively authorizing the Dual Registrant to act as principal for its own account;
(iii) prior to the execution of each principal transaction, the Dual Registrant informs the client orally or in writing, of the capacity in which it may act with respect to such transaction and obtains the client’s consent;
(iv) the Dual Registrant sends a written confirmation of the transaction, at or before completion of the transaction; and
(v) at least annually, the Dual Registrant provides the client with reports of principal transactions executed in reliance on the rule.
If Rule 206(3)-3T was permitted to sunset at the end of the year, after that date Dual Registrants that currently rely on Rule 206(3)-3T would be required to comply with Section 206(3)’s transaction-by-transaction written disclosure and consent requirements. This could limit access to certain securities for non-discretionary advisory clients of Dual Registrants.
Dodd Frank Act
As initially adopted, Rule 206(3)-3T was set to sunset on December 31, 2009. However, the rule has been extended several times for additional one or two year periods. The SEC has now proposed another two year extension because it believes that the issues raised by principal trading, including the restrictions in Section 206(3) of the Advisers Act should be considered as part of a broader consideration of the regulatory requirements applicable to broker-dealers and investment advisers in connection with the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd Frank Act”).
Section 913 of the Dodd Frank Act authorizes the SEC to promulgate rules regarding, among other things, the legal or regulatory standards of conduct for broker-dealers, investment advisers, and persons associated with these intermediaries when providing personalized investment advice about securities to retail customers. The SEC staff has recently focused on evaluating options regarding regulatory requirements applicable to broker-dealers and investment advisers and has also been reviewing the conduct of Dual Registrants to assess the impact to investors on the different supervisory structures and standards that govern the provision of brokerage and investment advisory services. Since the SEC’s consideration of these issues is ongoing and is not expected to be completed before December 14, 2014, the SEC has proposed to extend the rule. Comments to the SEC on this proposed extension must be received on or before September 17, 2014.