Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Monday, December 28, 2009

SEC Makes Permanent Investment Advisers Rule on Principal Trades

The SEC adopted as final Rule 206(3)-3T under the Investment Advisers Act of 1940, the interim final temporary rule that establishes an alternative means for investment advisers who are registered with the Commission as broker-dealers to meet the requirements of Section 206(3) of the Investment Advisers Act when they act in a principal capacity in transactions with certain of their advisory clients. As adopted, the only change to the rule is the expiration date. Rule 206(3)-3T will sunset on December 31, 2010.

According to the SEC release, Rule 206(3)-3T was designed to continue to provide the protection of transaction-by-transaction disclosure and consent to advisory clients when investment advisers seek to trade with them on a principal basis, subject to several conditions. Specifically, Rule 206(3)-3(T) permits an adviser, with respect to non-discretionary advisory accounts, to comply with Section 206(3) of the Advisers Act by, among other things, meeting the following conditions:

(i) providing written, prospective disclosure regarding the conflicts arising from principal trades;
(ii) obtaining written, revocable consent from the client prospectively authorizing the adviser to enter into principal transactions;
(iii) making certain disclosures, either orally or in writing, and obtaining the client’s consent before each principal transaction;
(iv) sending to the client confirmation statements disclosing the capacity in which the adviser has acted and disclosing that the adviser informed the client that it may act in a principal capacity and that the client authorized the transaction; and
(v) delivering to the client an annual report itemizing the principal transactions made during the year.

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