The SEC has extended by two years its temporary rule that provides an alternative means for registered investment advisers that are also registered as broker-dealers to meet the requirements of Section 206(3) of the Investment Advisers Act of 1940 (the “Advisers Act”). This provision, Rule 206(3)-3T, applies when investment advisers act in a principal capacity in transactions with certain of their advisory clients. Absent SEC action, the rule would have sunset on December 31, 2014. As a result of the SEC’s action, the Rule’s new sunset date is December 31, 2016.
Section 206(3) of the Advisers Act prohibits registered investment advisers from engaging in principal transactions with their clients unless they obtain written consents for each individual principal transaction. Without an alternative means of complying with this restriction, many advisers refrained from engaging in principal trades with their clients, including those in fee-based advisory accounts, due to the impracticality of promptly obtaining written consents for each transaction.
Rule 206(3)-3T provides an alternative means for investment advisers to comply with the limitations of Section 206(3). Among other things, the adviser must make certain disclosures to clients about conflicts of interest. The adviser must obtain written, revocable consents that prospectively authorize principal transactions. Under these circumstances, the Rule then permits the investment adviser to obtain either written or oral consent from the client with respect to each individual principal transaction. The availability of oral consent facilitates prompt decisions before there are changes in the market price of the security.
In adopting the extension, the SEC indicated that it continues to believe that the issues raised by principal trading, including the restrictions in Section 206(3) of the Advisers Act and its experiences with, and observations regarding, the operation of Rule 206(3)-3T, should be considered as part of its broader consideration of the regulatory requirements applicable to broker-dealers and investment advisers in connection with the Dodd-Frank Act.