On October 9, 2012, the Securities and Exchange Commission (the “SEC”) proposed to extend the date on which Rule 206(3)-3T (the “Rule”) under the Investment Advisers Act of 1940 (the “Advisers Act”) will expire from December 31, 2012 to December 31, 2014. The Rule is a temporary rule that establishes an alternative means for registered investment advisers that are also registered with the SEC as brokerdealers (“Dual Registrants”) to comply with Section 206(3) of the Advisers Act when they act in a principal capacity in transactions with certain of their non-discretionary advisory clients.
If the proposed extension is adopted, this will mark the third extension of the sunset date of the Rule. The Rule was initially adopted in September 2007 on an interim final basis and was supposed to expire on December 31, 2009, but that date was subsequently extended to December 31, 2010. The sunset date was again extended by two years to December 31, 2012 in order for the SEC to complete a study required by Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) and for the SEC to consider more broadly the regulatory requirements applicable to broker-dealers and investment advisers.
As previously reported in the September 13, 2010 Investment Management Regulatory Update and the October 2007 Investment Management Regulatory Update, the Rule generally allows Dual Registrants to trade on a principal basis with certain non-discretionary advisory accounts if, among other things: (i) the adviser discloses conflicts of interest associated with principal transactions and the manner in which such adviser addresses those conflicts, (ii) the client executes a blanket consent prospectively authorizing principal transactions, (iii) before the execution of each principal transaction, the adviser informs the client of the capacity in which it may act with respect to such transaction and obtains the client’s consent (either written or orally), (iv) at or before completion of each such transaction, the adviser sends the client written confirmation of the principal transaction and (v) at least annually, the adviser provides the client reports of principal transactions executed in reliance on the Rule.
If the Rule is allowed to expire on December 31, 2012, then, after that date, Dual Registrants will need to comply with Section 206(3)’s transaction-by-transaction written disclosure and consent requirements for all of their advisory accounts. This could, according to the SEC, limit the access of non-discretionary advisory clients of Dual Registrants to certain securities and require firms to make substantial changes to disclosure documents, client agreements, procedures and systems.
The SEC has requested comments by November 13, 2012 on a list of questions set forth in the proposed rule release.