This year could bring the end of Advisers Act rule 206(3)-3T (temporary rule for principal trades with certain advisory clients) – although this has been said before (IA Watch, Dec. 18, 2014). The SEC’s Division of Investment Management has stated that it has been examining dual-registrants to help it assess whether the rule is necessary.
IA Watch has obtained a new document request letter that IM sent to a firm inquiring about the temporary rule. This new exam comes months after the Parallax enforcement action that focused on principal trading violations (IA Watch, Aug. 18, 2015).
Advisers Act section 206(3) (prohibited transactions by IAs) requires firms executing principal trades to disclose “to such client in writing before the completion of such transaction the capacity in which he is acting and obtaining the consent of the client to such transaction.”
Trained on temporary rule
However, the new document request letter shows the SEC isn’t interested in compliance with section 206(3) but only rule 206(3)-3T. It asks about the firm’s use of principal transactions in reliance on the rule, including the number of accounts that are both brokerage and non-discretionary advisory accounts, total AUM for these accounts and which accounts gave written consent to engage in principal transactions and who revoked their permission during the exam period.
Examiners also seek the gross value of transactions executed under reliance of the rule, the types of securities transacted, any relevant compliance P&Ps and records “memorializing clients’ oral consent (or refusal to give oral consent)” under the rule.
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