On August 19, 2016, the Securities and Exchange Commission ("SEC") stated in a letter that it will not take further action to extend the sunset date of SEC Rule 206(3)-3T, which is set to expire on December 31, 2016.14 The SEC first adopted
Rule 206(3)-3T in 2007 to provide an alternative means for investment advisers that are also registered with the SEC as a broker-dealer ("Dual Registrants") to comply with Section 206(3) of the Investment Advisers Act ("Advisers Act") when they act in a principal capacity in transactions with certain advisory clients.15 In December 2010, the SEC extended the sunset provision on the rule to December 13, 2012. Subsequent amendments to the rule extended the sunset date again, pending completion of a study of the regulatory requirements applicable to broker-dealers, mandated by Section 913 of the Dodd-Frank Act.
In its August 2016 letter, the SEC noted that few firms currently rely on Rule 206(3)-3T, and, as such, it has decided not to take further action to extend the sunset date of the rule. Individual exemptive relief may be available upon application to the SEC, where firms can provide a similar means of compliance with Section 206(3) of the Advisers Act.
Background of Rule 206(3)-3T
Under Section 206(3) of the Advisers Act, Dual Registrants must provide written notice and obtain client consent on a transaction-by-transaction basis when trading as a principal with a client. Rule 206(3)-3T provided Dual Registrants with an alternative means to comply with Section 206(3), while still requiring transaction-by-transaction disclosure. Specifically, the Rule permitted a Dual Registrant to engage in principal transactions with a nondiscretionary advisory client, subject to the following conditions:
- Blanket Written Notice and Revocable Consent. The Rule required the Dual Registrant to provide the client with a blanket written prospective notice and obtain the client's blanket written revocable prospective consent with respect to principal transactions.
- Eligible Securities. The Rule applied to any principal trade that did not involve (1) a security issued by the Dual Registrant (or by an affiliate of the Dual Registrant), or (2) a transaction in which the Dual Registrant (or an affiliate of the Dual Registrant) acted as underwriter, other than offerings of non-convertible investment grade debt securities.16
- Trade-by-Trade Disclosure/Client Consent. The Rule required that the Dual Registrant, prior to the completion of each principal transaction, must (1) inform the client that the Dual Registrant is acting as principal for its own account with respect to the transaction, and (2) obtain consent from the client for the transaction. The trade-bytrade disclosure and consent may be written or oral.
- Confirmation Disclosure. The Rule required that the confirmation provided to the client under Rule 10b-10 of the Exchange Act, at or before completion of the transaction, indicate in plain English that (1) the Dual Registrant disclosed to the client prior to the execution of the transaction that it may act in a principal capacity in connection with the transaction, (2) the client authorized the transaction, and (3) the Dual Registrant sold the security to or purchased the security from the client for its own account.
- Annual Report. The Rule required that the Dual Registrant provide the client with a list of all principal trades that were executed in the client's account during the prior year, including the dates and prices of the transactions.
With the sunset of the temporary rule, Dual Registrants will need to comply with the more cumbersome provisions of Section 206(3), in the absence of any further regulatory relief.