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SEC Proposes Extension of Principal Trade Rule for Registered Advisers/Broker-Dealers




by:
Peter D. Fetzer
Jason M. Hille
Foley & Lardner LLP - Milwaukee Office

Terry D. Nelson
Foley & Lardner LLP - Madison Office

 
September 2, 2014

Previously published on August 29, 2014

The SEC has proposed extending to December 31, 2016, the sunset date for the expiration of Rule 206(3)-3T (the “Rule”) under the Investment Advisers Act of 1940 (the “Advisers Act”). The Rule allows SEC-registered investment advisers who are also SEC-registered broker-dealers to sell securities on a principal basis to their clients without violating the “anti-fraud” provisions under the Advisers Act.

The Rule was first enacted under the Advisers Act by the SEC in 2007, and extended in each of 2009, 2010 and 2012. The Rule permits principal trading with clients by such registrants without having to obtain, in advance, the client’s consent to each transaction. An advance client consent is otherwise required under the rules of the Advisers Act. The SEC believes that, absent the Rule, such advisers would place their clients in a position where they would not be able to have full access to possible investment opportunities. Without the Rule, such advisers would also have to implement substantial policies and procedures in order to comply with the client consent per transaction requirement.

The SEC is now asking the public to comment generally on the proposed Rule extension and specifically to consider, among other things, whether the two-year extension is sufficient, whether the Rule should be extended at all, and, if not extended, what regulatory relief, if any, should be provided for advisers who are also registered as broker-dealers from the client consent requirement.

The consensus among SEC observers is that the public comment period will end with little opposition to the proposal to extend the Rule for another two-year period. The SEC is likely to extend the Rule as it currently provides but, in the meantime, continue with its ongoing “bigger-picture” review, as required under Section 913 of the Dodd-Frank Act, to conduct a study and provide a report to Congress concerning the obligations of broker-dealers and investment advisers. It is likely that the SEC’s subsequent report to Congress will include the application of the Rule and how it should fit within the overall regulatory scheme.



 

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
 

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