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SEC Adopts Temporary Rule Regarding Principal Trades with Certain Advisory Clients

By | December 2, 2010

On September 24, 2007, the SEC adopted, on an interim final basis, rule 206(3)-3T, a temporary rule under the Investment Advisers Act of 1940 that provides an alternative means for investment advisers who are registered with the SEC as broker-dealers to meet the requirements of section 206(3) of the Investment Advisers Act when they act in a principal capacity in transactions with certain of their advisory clients.  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 (the “FPA Decision”), 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.

 As initially adopted on an interim final basis, rule 206(3)-3T was set to expire on December 31, 2009.  In December 2009, however, the SEC adopted rule 206(3)-3T as a final rule in the same form in which it was adopted on an interim final basis in 2007, except that the SEC extended the rule’s sunset period by one year to December 31, 2010.  

 Under section 913 of the Dodd-Frank Act, the SEC is required to conduct a study, and provide a report to Congress, concerning the obligations of broker-dealers and investment advisers, including the standards of care applicable to those intermediaries and their associated persons. The SEC intends to deliver the report concerning this study, as required by the Dodd-Frank Act, no later than January 21, 2011. As part of this study and any rulemaking that may follow, the SEC expects to consider the issues raised by principal trading, including the restrictions in section 206(3) of the Investment Advisers Act and the SEC’s experiences with, and observations regarding, the operation of rule 206(3)-3T.

 Accordingly the SEC is proposing to amend rule 206(3)-3T only to extend the rule’s expiration date by two additional years.  If the rule is amended, absent further action by the SEC, the rule will expire on December 31, 2012.

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Contact Steve Quinlivan for more information.