October 31, 2014

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SEC Extends Sunset Date for Temporary Rule Regarding Principal Trades with Certain Advisory Clients

The Securities and Exchange Commission has extended the sunset date of Rule 206(3)-3T under the Investment Advisers Act of 1940 (the Act) from December 31, 2012, to December 31, 2014. Rule 206(3)-3T is a temporary rule that provides certain investment advisers with alternative means to meet the requirements of Section 206(3) of the Act regarding acting in a principal capacity in transactions with certain advisory clients. The SEC adopted this extension because it believes that the issues raised by principal trading should be considered as part of a broader consideration of the regulatory requirements applicable to broker-dealers and investment advisers in connection with the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Under Section 206(3), an investment adviser entering into a principal transaction with an advisory client is required to satisfy certain disclosure and consent requirements on a transaction-by-transaction basis. Due to difficulties regarding compliance with the trade-by-trade requirements of Section 206(3), in 2007 the SEC adopted Rule 206(3)-3T to provide investment advisers who are also registered with the SEC as broker-dealers an alternative means to comply with the requirements of Section 206(3).

Rule 206(3)-3T requires that the investment adviser also be registered as a broker-dealer and that each account for which the investment adviser relies on this rule be a non-discretionary brokerage account. Rule 206(3)-3T also requires that the investment adviser, with respect to the accounts, (i) provide written prospective disclosure regarding the conflicts arising from principal trades; (ii) obtain written, revocable consent from the client prospectively authorizing the investment adviser to enter into principal transactions; (iii) make certain disclosures, either orally or in writing, and obtaining the client’s consent before each principal transaction; (iv) send to the client confirmation statements disclosing the capacity in which the investment adviser has acted and disclosing that the investment adviser informed the client that it may act in a principal capacity and that the client authorized the transaction; and (v) deliver to the client an annual report itemizing the principal transactions.

Click here to read the SEC’s Adopting Release Extending Rule 206(3)-3T.

©2014 Katten Muchin Rosenman LLP

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About this Author

Joseph Iskowitz, Katten Muchin Law Firm, Finance Attorney
Partner

Joseph Iskowitz forms and represents domestic and offshore investment funds, including private equity and hedge funds. He also counsels fund managers, investors and third-party marketers of private investment pools.

Joseph assists clients with structuring joint ventures between multiple investment managers, seeding arrangements, registration with the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC), and continuing compliance with SEC and the CFTC regulations. He advises private investment funds and their managers on securities and...

212-940-6351
Avi Badash, Katten Muchin Law firm, finance attorney
Associate

Avi Badash concentrates his practice in financial services matters.

Prior to joining the firm, Avi was an Associate Director at the Financial Industry Regulatory Authority (FINRA), where he was involved in securities arbitration matters among broker-dealers and between broker-dealers and their customers or registered representatives.

While in law school, Avi was a member of the Cardozo Securities Arbitration Clinic.

212-940-7054