The Securities and Exchange Commission has proposed to extend by two years Rule 206(3)-3T. The temporary rule establishes 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”) when they act in a principal capacity in transactions with certain of their advisory clients. Absent SEC action, Rule 206(3)-3T will sunset on December 31, 2012.
The SEC adopted the Rule 206(3)-3T as a temporary rule in September 2007, as we have previously reported in prior issues of Structured Thoughts. 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 transaction. Without an alternative means of compliance with this restriction, many advisers refrained from engaging in principal trades with their clients, including those in fee-based advisory accounts (which, in light of the FPA decision, were now subject to the Advisers Act). 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, and obtain written, revocable consents that prospectively authorize principal transactions. Many structured products market participants rely on Rule 206(3)-3T in connection with sales of structured products issued by affiliated issuers or underwritten by the issuer’s affiliated broker-dealers to advisory accounts.
The SEC proposed the amendments to Rule 206(3)-3T on October 9, 2012. The comment period ends 30 days after the publication of the notice in the Federal Register.