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