12.23.2009 The Securities and Exchange Commission (SEC) adopted, as final, Rule 206(3)-3T under the Investment Advisers Act of 1940 (Advisers Act), the interim final temporary rule that establishes an alternative means for investment advisers who are registered with the SEC as broker-dealers to meet the requirements of § 206(3) of the Advisers Act when they act in a principal capacity in transactions with certain of their advisory clients. As adopted, the only change to the rule is the expiration date. Rule 206(3)-3T will sunset on December 31, 2010. Rule 206(3)-3T was set to expire on December 31, 2009, approximately 27 months after its adoption.
The purpose of the rule was to permit broker-dealers to sell to their advisory clients, in the wake of Financial Planning Association v. SEC, certain securities held in the proprietary accounts of their firms that might not be available on an agency basis—or might be available on an agency basis only on less attractive terms—while protecting clients from conflicts of interest as a result of such transactions. Rule 206(3)-3T permits an adviser, with respect to non-discretionary advisory accounts, to comply with § 206(3) of the Advisers Act by, among other things, meeting the following conditions:
- Providing written, prospective disclosure regarding the conflicts arising from principal trades;
- Obtaining written, revocable consent from the client prospectively authorizing the adviser to enter into principal transactions;
- Making certain disclosures, either orally or in writing, and obtaining the client’s consent before each principal transaction;
- Sending to the client confirmation statements disclosing the capacity in which the adviser has acted and disclosing that the adviser informed the client that it may act in a principal capacity and that the client authorized the transaction; and
- Delivering to the client an annual report itemizing the principal transactions made during the year.
The rule also requires that the investment adviser be registered as a broker-dealer under § 15 of the Securities Exchange Act of 1934 (Exchange Act) and that each account for which the adviser relies on the rule be a brokerage account subject to the Exchange Act, and the rules thereunder, and the rules of the self-regulatory organization(s) of which it is a member. The rule is not available for principal trades of securities if the investment adviser or a person who controls, is controlled by, or is under common control with the adviser is the issuer or is an underwriter of the security. The rule includes one exception—an adviser may rely on the rule for trades in which the adviser or a control person is an underwriter of non-convertible investment-grade debt securities.
Rule 206(3)-3T(b) clarifies that the rule does not relieve in any way an investment adviser from its obligation to act in the best interests of each of its advisory clients, including fulfilling the duty with respect to the best price and execution for a particular transaction for the advisory client.
Click http://www.sec.gov/rules/final/2009/ia-2965.pdf to access the adopting release.