Principal Trade Rule Extension for Investment Advisers/Broker-Dealers

A temporary rule under Rule 206(3)-3T under the Investment Advisers Act of 1940 was set to expire at the end of this year. The temporary rule permits those registered investment advisers who are also registered broker-dealers an alternative to complying with Section 206(3) under the Advisers Act, which prohibits certain principal transactions with clients. The SEC recently acted to extend the effectiveness of the temporary rule until December 31, 2014.

Section 206(3) prohibits an adviser from engaging in or effecting a transaction for a client while acting either as a principal for its own account, or as a broker for a person other than the client, without providing certain disclosures and obtaining the client’s prior consent. The extension of the effectiveness of the temporary rule relief from the prohibition under Sec. 206(3) allows such advisers to conduct principal transactions under certain circumstances.

The SEC’s extension of the temporary rule under Rule 206(3)-3T further demonstrates that the SEC has, to date, failed to complete certain mandates by U.S. Congress, in this case, under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. In that Act, Congress mandated that the SEC conduct a study as to the future regulation of investment advisers and broker-dealers. Early in 2011, the SEC’s staff, in partial response to that mandate, made several recommendations about rules necessary to create a uniform fiduciary standard for all investment advisers, regardless if they were also registered as broker-dealers. To date, the SEC has not acted on the staff recommendations. Accordingly, the temporary rule under Rule 206(3)-3T which takes into account the special needs of investment advisers who are also registered broker-dealers to comply with the principal trading prohibition, is still necessary until formal rulemaking is conducted based on the staff’s recommendations as to uniformity among all registered investment advisers.