Temporary Rule Regarding Principal Trades With Certain Advisory Clients, 69009-69015 [E9-30877]
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Federal Register / Vol. 74, No. 249 / Wednesday, December 30, 2009 / Rules and Regulations
by the National Futures Association,
and if filed electronically, a paper copy
of such filing with the original manually
signed certification must be maintained
by such introducing broker or applicant
in accordance with § 1.31.
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■ 3. Section 1.12 is amended by:
■ a. Revising paragraphs (a)(2) and
(i)(1);
■ b. Removing paragraph (a)(3); and
■ c. Adding paragraph (i)(3) as follows:
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§ 1.12 Maintenance of minimum financial
requirements by futures commission
merchants and introducing brokers.
(a) * * *
(2) Provide together with such notice
documentation in such form as
necessary to adequately reflect the
applicant’s or registrant’s capital
condition as of any date such person’s
adjusted net capital is less than the
minimum required. The applicant or
registrant must provide similar
documentation for other days as the
Commission may request.
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(i)(1) Every notice and written report
required to be given or filed by this
section (except for notices required by
paragraph (f) of this section) by a futures
commission merchant or a selfregulatory organization must be filed
with the regional office of the
Commission with jurisdiction over the
state in which the registrant’s principal
place of business is located, with the
principal office of the Commission in
Washington, DC, with the designated
self-regulatory organization, if any; and
with the Securities and Exchange
Commission, if such registrant is a
securities broker or dealer. Every notice
and written report required to be given
or filed by this section by an applicant
for registration as a futures commission
merchant must be filed with the
National Futures Association (on behalf
of the Commission), with the designated
self-regulatory organization, if any, and
with the Securities and Exchange
Commission, if such applicant is a
securities broker or dealer. Any notice
or report filed with the National Futures
Association pursuant to this paragraph
shall be deemed for all purposes to be
filed with, and to be the official record
of, the Commission.
*
*
*
*
*
(3) Every notice or report required to
be provided in writing to the
Commission under this section may, in
lieu of facsimile, be filed via electronic
transmission using a form of user
authentication assigned in accordance
with procedures established by or
approved by the Commission, and
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15:16 Dec 29, 2009
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otherwise in accordance with
instructions issued by or approved by
the Commission. Any such electronic
submission must clearly indicate the
registrant or applicant on whose behalf
such filing is made and the use of such
user authentication in submitting such
filing will constitute and become a
substitute for the manual signature of
the authorized signer.
Issued in Washington, DC, on December
24, 2009, by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. E9–31032 Filed 12–29–09; 8:45 am]
BILLING CODE P
SECURITIES AND EXCHANGE
COMMISSION
17 CFR Part 275
[Release No. IA–2965; File No. S7–23–07]
RIN 3235–AJ96
Temporary Rule Regarding Principal
Trades With Certain Advisory Clients
AGENCY: Securities and Exchange
Commission.
ACTION: Final rule.
SUMMARY: The Securities and Exchange
Commission is adopting as final Rule
206(3)–3T under the Investment
Advisers Act of 1940, the interim final
temporary rule that establishes an
alternative means for investment
advisers who are registered with the
Commission 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. As adopted, the only
change to the rule is the expiration date.
Rule 206(3)–3T will sunset on December
31, 2010.
DATES: Effective Date: December 30,
2009.
FOR FURTHER INFORMATION CONTACT:
Sarah A. Bessin, Assistant Director,
Daniel S. Kahl, Branch Chief, or
Matthew N. Goldin, Senior Counsel, at
(202) 551–6787 or IArules@sec.gov,
Office of Investment Adviser
Regulation, Division of Investment
Management, Securities and Exchange
Commission, 100 F Street, NE.,
Washington, DC 20549–5041.
SUPPLEMENTARY INFORMATION: The
Securities and Exchange Commission is
adopting as final temporary Rule
206(3)–3T [17 CFR 275.206(3)–3T]
under the Investment Advisers Act of
1940 [15 U.S.C. 80b].
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69009
I. Background
On September 24, 2007, we adopted,
on an interim final basis, Rule 206(3)–
3T, a temporary rule under the
Investment Advisers Act of 1940 (the
‘‘Advisers Act’’) that provides an
alternative means for investment
advisers who are registered with us as
broker-dealers to meet the requirements
of Section 206(3) of the Advisers Act
when they act in a principal capacity in
transactions with certain of their
advisory clients.1 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’’),2 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 3—while protecting clients from
conflicts of interest as a result of such
transactions.4
The rule vacated in the FPA Decision
had allowed broker-dealers to offer feebased accounts without complying with
the Advisers Act, including the
requirements of Section 206(3). Section
206(3) makes is unlawful for any
investment adviser, directly or
indirectly, ‘‘acting as a principal for his
own account, knowingly to sell any
security to or to purchase any security
from a client * * *, without disclosing
to such client in writing before the
completion of such transaction the
1 Rule 206(3)–3T [17 CFR 275.206(3)–3T]. All
references to Rule 206(3)–3T and the various
sections thereof in this Release are to 17 CFR
275.206(3)–3T and its corresponding sections. See
also Temporary Rule Regarding Principal Trades
with Certain Advisory Clients, Investment Advisers
Act Release No. 2653 (Sep. 24, 2007) [72 FR 55022
(Sep. 28, 2007)] (‘‘2007 Principal Trade Rule
Release’’).
2 482 F.3d 481 (D.C. Cir. 2007). In the FPA
Decision, handed down on March 30, 2007, the
Court of Appeals for the District of Columbia
Circuit vacated (subject to a subsequent stay until
October 1, 2007) Rule 202(a)(11)–1 under the
Advisers Act. Rule 202(a)(11)–1 provided, among
other things, that fee-based brokerage accounts were
not advisory accounts and were thus not subject to
the Advisers Act. For further discussion of feebased brokerage accounts, see 2007 Principal Trade
Rule Release, Section I.
3 See 2007 Principal Trade Rule Release at nn.19–
20 and Section VI.C.
4 As a consequence of the FPA Decision, brokerdealers offering fee-based brokerage accounts
became subject to the Advisers Act with respect to
those accounts, and the client relationship became
fully subject to the Advisers Act. These brokerdealers—to the extent they wanted to continue to
offer fee-based accounts and met the requirements
for registration—had to register as investment
advisers, if they had not done so already, act as
fiduciaries with respect to those clients, disclose all
material conflicts of interest, and otherwise fully
comply with the Advisers Act, including the
restrictions on principal trading contained in
Section 206(3) of the Act. See 2007 Principal Trade
Rule Release, Section I.
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Federal Register / Vol. 74, No. 249 / Wednesday, December 30, 2009 / Rules and Regulations
capacity in which he is acting and
obtaining the consent of the client to
such transaction.’’ 5 Prior to our
adoption of Rule 206(3)–3T, several
firms that had offered fee-based
brokerage accounts informed our staff
that the written disclosure and the
client consent requirements of Section
206(3) act as an operational barrier to
their ability to engage in principal
trades with their clients. Most informed
us that they planned to discontinue feebased brokerage accounts as a result of
the FPA decision. They explained that
they planned to do so because of the
application of the Advisers Act and that,
unless they were provided an
exemption from (or an alternative means
of complying with) Section 206(3), they
would be unable to provide the same
range of services to those fee-based
brokerage customers who elected to
become advisory clients and would
expect few to elect to do so.
Rule 206(3)–3T was designed to
continue to provide the protection of
transaction-by-transaction disclosure
and consent 6 to advisory clients when
investment advisers seek to trade with
them on a principal basis, subject to
several conditions.7 Specifically, Rule
206(3)–3(T) permits an adviser, with
respect to non-discretionary advisory
accounts,8 to comply with Section
206(3) of the Advisers Act by, among
other things, meeting the following
conditions:
(i) Providing written, prospective
disclosure regarding the conflicts arising
from principal trades; 9
(ii) Obtaining written, revocable
consent from the client prospectively
authorizing the adviser to enter into
principal transactions; 10
(iii) Making certain disclosures, either
orally or in writing, and obtaining the
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5 15
U.S.C. 80b–6(3) (emphasis added). See also
2007 Principal Trade Rule Release, Section II.A.
6 Rule 206(3)–3T(a)(4). See also 2007 Principal
Trade Rule Release, Section II.B.4.
7 For a discussion of Section 206(3) of the
Advisers Act, its legislative history and our past
interpretations of it, see the 2007 Principal Trade
Rule Release, Section II.A.
8 For purposes of the rule, the term ‘‘investment
discretion’’ has the same meaning as in Section
3(a)(35) of the Exchange Act [15 U.S.C. 78c(a)(35)],
except that it excludes investment discretion
granted by a customer on a temporary or limited
basis. Rule 206(3)–3T(a)(1). See also 2007 Principal
Trade Rule Release at n. 31.
9 Rule 206(3)–3T(a)(3). See also 2007 Principal
Trade Rule Release, Section II.B.3.
10 Rule 206(3)–3T(a)(3). Rule 206(3)–3T also
requires an adviser seeking to rely on the rule to
include with each written disclosure required by
the rule a conspicuous, plain English statement that
the client may revoke the prospective, written
consent without penalty at any time by written
notice to the investment adviser. Rule 206(3)–
3T(a)(8). See also 2007 Principal Trade Rule
Release, Section II.B.3.
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client’s consent before each principal
transaction; 11
(iv) Sending to the client confirmation
statements disclosing the capacity in
which the adviser has acted and
disclosing that the adviser informed the
client that it may act in a principal
capacity and that the client authorized
the transaction; 12 and
(v) Delivering to the client an annual
report itemizing the principal
transactions made during the year.13
The rule also requires that the
investment adviser be registered as a
broker-dealer under Section 15 of the
Securities Exchange Act of 1934 (the
‘‘Exchange Act’’) [15 U.S.C. 78o] and
that each account for which the adviser
relies on the rule be a brokerage account
subject to the Exchange Act, and the
rules thereunder, and the rules of the
self-regulatory organization(s) (‘‘SRO’’)
of which it is a member.14 The rule is
not available for principal trades of
securities if the investment adviser or a
person who controls, is controlled by, or
is under common control with the
adviser (‘‘control person’’) is the issuer
or is an underwriter of the security.15
The rule includes one exception—an
adviser may rely on the rule for trades
in which the adviser or a control person
is an underwriter of non-convertible
investment-grade debt securities.16 Rule
206(3)–3T(b) clarifies that the rule does
not relieve in any way an investment
adviser from its obligation to act in the
best interests of each of its advisory
clients, including fulfilling the duty
with respect to the best price and
execution for a particular transaction for
the advisory client.17 Rule 206(3)–3T
was set to expire on December 31, 2009,
approximately 27 months after its
adoption.18
II. Discussion
We are adopting Rule 206(3)–3T in
the same form in which we adopted it
on an interim final basis in 2007, except
that the sunset period of the rule will
end one year later (on December 31,
11 Rule 206(3)–3T(a)(4). See also 2007 Principal
Trade Rule Release, Section II.B.4.
12 Rule 206(3)–3T(a)(5). See also 2007 Principal
Trade Rule Release, Section II.B.5.
13 Rule 206(3)–3T(a)(6). See also 2007 Principal
Trade Rule Release, Section II.B.6.
14 Rule 206(3)–3T(a)(7). See also 2007 Principal
Trade Rule Release, Section II.B.7.
15 Rule 206(3)–3T(a)(2). See also 2007 Principal
Trade Rule Release, Section II.B.2.
16 Rule 206(3)–3T(a)(2). See also 2007 Principal
Trade Rule Release, Section II.B.2. A separate
Commission rulemaking may have an impact on the
rule’s definition of ‘‘non-convertible investment
grade debt securities.’’ See note 34 below.
17 Rule 206(3)–3T(b). See also 2007 Principal
Trade Rule Release, Section II.B.8.
18 Rule 206(3)–3T(d). See also 2007 Principal
Trade Rule Release, Section II.B.9.
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2010). Absent further action by the
Commission, Rule 206(3)–3T will expire
on December 31, 2010. As we continue
to assess the operation of the rule along
with intervening developments, we
believe that the substantive provisions
of Rule 206(3)–3T as it was adopted on
an interim final basis provide sufficient
protections to advisory clients to
warrant its continued operation for an
additional limited period of time. We
will use that time to consider whether
to propose to continue the rule beyond
the revised sunset date and, if so, what
if any modifications should be made to
the rule.
a. Comments on the Scope and
Conditions of the Rule
We received comment letters from
eight commenters on the interim final
rule.19 Several favored narrowing the
scope of the exemption provided by the
rule or opposed its expansion.20 Others,
however, urged us to expand the rule’s
exemption to cover additional
securities.21 Some commenters
suggested that an adviser be prohibited
from relying on the rule when trading
any securities underwritten or issued by
the adviser or any of its affiliates (i.e.,
that we exclude underwritten nonconvertible investment grade debt
securities).22 Others asked that we allow
advisers, in reliance on the rule, to
engage in principal trades with clients
in various types of securities the adviser
or an affiliate underwrote that are highly
liquid and for which ascertainable
prices are readily available.23
Some commenters generally viewed
the protections afforded to clients under
the rule as inadequate,24 while others
urged us to modify the rule to make it
easier for advisers to effect principal
19 The comment letters are available at https://
www.sec.gov/comments/s7-23-07/s72307.shtml.
However, one additional comment letter was
submitted in connection with our proposed
Interpretive Rule under the Advisers Act Affecting
Broker-Dealers, Investment Advisers Act Release
No. 2652 (Sep. 24, 2007). International Association
of Small Broker Dealers and Advisers (Oct. 25,
2007) (‘‘IASBDA Letter.’’) The IASBDA Letter
addresses one particular aspect of the rule, as noted
below, and is available at https://www.sec.gov/
comments/s7-22-07/s72207-3.pdf.
20 See, e.g., Comment Letter of the Financial
Planning Association (Nov. 30, 2007) (‘‘FPA Letter
I’’); Comment Letter of the National Association of
Personal Financial Advisors (Nov. 30, 2007)
(‘‘NAPFA Letter’’).
21 See, e.g., Comment Letter of the Securities
Industry and Financial Markets Association (Nov.
30, 2007) (‘‘SIFMA Letter I’’); Comment Letter of
Davis Polk & Wardwell (Dec. 4, 2007) (‘‘DPW
Letter’’).
22 See, e.g., Comment Letter of Fund Democracy
and the Consumer Federation of America (Nov. 30,
2007) (‘‘FD/CFA Letter’’).
23 See, e.g., SIFMA Letter I.
24 See, e.g., NAPFA Letter.
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Federal Register / Vol. 74, No. 249 / Wednesday, December 30, 2009 / Rules and Regulations
transactions with their clients.25 For
example, one commenter urged us to
limit the rule’s relief to principal
transactions with sophisticated or
wealthy investors who are in a position
to protect themselves.26 Another
suggested the rule expressly require
firms to develop policies and
procedures that are specifically
designed to detect, deter and prevent
disadvantageous principal
transactions.27 And others suggested
that we require that the disclosure
supporting the initial client
authorization for principal trades be in
a separately executed, stand-alone
document and not permit it to be
incorporated directly into an account
opening agreement.28 Some commenters
asserted, however, that the disclosure
requirements—in particular, requiring
transaction-by-transaction disclosures
for principal trades with sophisticated
investors—were too restrictive,29 while
others argued that they did not go far
enough.30 Some commenters suggested
we impose additional disclosures or
disclosure-related requirements.31 One
commenter questioned the rule’s overall
focus on disclosure and urged us to
consider instead requiring affirmative
measures designed to prevent principal
trading abuses.32
Commenters who addressed the issue
generally agreed with our view that
principal trades in securities issued or
underwritten by an adviser or its control
persons should not be permitted under
the rule.33 However, these commenters
expressed differing views with respect
25 See,
e.g., DPW Letter.
Letter I.
27 FD/CFA Letter.
28 See, e.g., FD/CFA Letter; NAPFA Letter; FPA
Letter I.
29 See, e.g., DPW Letter (although supporting the
rule, commenting that the Commission should
provide more relief from the restrictions of Section
206(3) to permit affirmative waiver of the
transaction-by-transaction disclosure and consent
requirements with respect to transactions with
financially sophisticated investors involving certain
‘‘readily marketable’’ securities).
30 See, e.g., Comment Letter of the Investment
Advisers Association (Nov. 30, 2007) (‘‘IAA Letter’’)
(expressing strong opposition to any expansion of
the relief provided in the rule, or relaxation of the
rule’s conditions, and emphasizing the importance
of monitoring the rule in practice before making
further changes); FPA Letter I (expressing concern
about the risks attendant to principal trades);
NAPFA Letter (arguing that any expansion of the
scope of the rule would be inappropriate because
of the potential risks associated with principal
trades).
31 See, e.g., FD/CFA Letter; FPA Letter I
(expressing concern that the transaction-specific
disclosures required by the rule may not provide
investors with enough information regarding
conflicts of interest and suggested additional
disclosures that should be required by the rule).
32 See note 27 above and accompanying text.
33 See, e.g., FD/CFA Letter; FPA Letter I; SIFMA
Letter I.
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to the rule’s exception from the general
prohibition for trades in which the
adviser or control person is an
underwriter of non-convertible
investment grade debt securities.34 We
also received mixed comments on the
rule’s limitation of relief to investment
advisers that are registered with the
Commission as broker-dealers. Some
commenters, generally those
representing financial institutions that
act as both advisers and broker-dealers,
supported the limitation 35 while others
opposed it.36
Several commenters agreed with our
decision to limit the rule to non34 Compare SIFMA Letter I (arguing that we
should expand the exception to underwritten
preferred stock, convertible debt, and certificates of
deposit (among others)) with FPA Letter I
(specifically urging us not to extend the exception
to debt instruments other than investment grade
municipal debt and corporate debt and expressing
concern with price transparency of debt
instruments, generally) and FD/CFA Letter (arguing
that the exception should not be further expanded
or that it should be eliminated altogether because
of concerns regarding the price transparency of debt
instruments).
One commenter supporting a broadening of the
exception also urged us to modify our definition of
‘‘investment grade debt security’’ to require that a
qualifying security receive ratings from only one
nationally recognized statistical rating organization
(‘‘NRSRO’’) instead of two. SIFMA Letter I. We are
considering more globally, and in a separate
rulemaking, whether our inclusion of requirements
related to credit ratings in our rules and forms as
an indication of investment grade quality has, in
effect, placed an ‘‘official seal of approval’’ on
ratings and has adversely affected the quality of due
diligence and investment analysis. See References
to Ratings of Nationally Recognized Statistical
Rating Organizations in Rules Under the Investment
Company Act and Investment Advisers Act,
Investment Company Act Release No. 28327 (Jul. 1,
2008) [73 FR 40124 (July 11, 2008)]. In conjunction
with recently reopening the comment period for the
proposal with respect to Rule 206(3)–3T, the
Commission requested comment on whether it
should substitute an approach that uses credit
ratings as a minimum standard along with
additional criteria that must be met with regard to
evaluating securities. The re-opened comment
period closed on December 8, 2009. See References
to Ratings of Nationally Recognized Statistical
Rating Organizations, Investment Company Act
Release No. 28939 (Oct. 5, 2009) [74 FR 52358 (Oct.
9, 2009)].
35 See, e.g., SIFMA Letter I (arguing that the dual
registration condition preserves important investor
protections that were available to former fee-based
brokerage customers who elected after the FPA
Decision to convert their accounts to advisory
accounts).
36 See, e.g., FPA Letter I (urging us to eliminate
the limitation because investors would already
receive the protections of both the Advisers Act and
the Exchange Act whether the adviser is itself also
registered as a broker-dealer or whether it is simply
affiliated with a broker-dealer, and further arguing
that that the condition may have anticompetitive
effects, providing an advantage to investment
advisers that are also registered as broker-dealers);
Comment Letter of the American Bar Association,
section of Business Law’s Committee on Federal
Regulation of Securities (Apr. 18, 2008) (‘‘ABA
Committee Letter’’) (arguing that the substantial
regulatory burdens of applying two regulatory
regimes is not offset by additional investor
protection benefits).
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69011
discretionary accounts.37 In contrast,
one commenter urged us to expand the
rule to be available to all advisory
accounts, not just non-discretionary
ones.38 One commenter urged us to
limit the scope of the rule so that
advisers may only rely on it when they
are conducting a principal trade with a
‘‘qualified client,’’ as defined under
Rule 205–3 [17 CFR 275.205–3] under
the Advisers Act,39 while another
argued that the rule should not be
restricted to particular clients.40
b. Comments on Sunset Provision
Five commenters addressed the
duration of Rule 206(3)–3T.41 Three
expressed support for the temporary
duration of the rule, arguing that, in
light of the substantial risks associated
with principal trading facilitated by the
rule, a temporary effectiveness period
would be important for the Commission
to assess whether the scope of relief
provided by the rule is appropriate.42
Two commenters supported making the
rule permanent at the end of the sunset
provision with broadened relief.43
We received two subsequent letters
from market participants. The Securities
Industry and Financial Markets
Association (SIFMA) urged us to extend
37 See, e.g., FD/CFA Letter (arguing that
discretionary accounts present a ‘‘greater risk of
abuse as a general matter’’ and expressed
appreciation for the protections provided by this
limitation); IAA Letter; SIFMA Letter I (agreeing
that the rule should apply to all non-discretionary
accounts, but specifically noting that the rule
should not be further limited in application to
former fee-based brokerage accounts only); FPA
Letter I (supporting the limitation as providing a
critical investor protection, but arguing that we
should consider further narrowing the nondiscretionary account limitation to include only
those accounts that were formerly fee-based
brokerage accounts).
38 ABA Committee Letter (arguing that the
specific exclusion in the rule for adviserunderwritten securities, together with an adviser’s
best execution obligations, provides investors with
sufficient investor protections and therefore clients
in discretionary accounts should not be precluded
from the benefits of the relief provided by the rule).
39 FPA Letter I (further arguing that institutional
clients or natural persons who are deemed to be
‘‘qualified clients’’ for purposes of Rule 205–3 are
better positioned to understand the nature of
principal transactions and the potential conflicts
and, therefore, are better able to protect themselves
against potential abuses than are other investors).
Another commenter also expressed general
objections to the placing of any principal trades by
investment advisers. NAPFA Letter.
40 SIFMA Letter I (noting that all investors should
be able to benefit from the greater investment
choices, potentially enhanced executions and
additional liquidity provided by the rule).
41 FPA Letter I; Comment Letter of the Financial
Planning Association (Sep. 16, 2008) (‘‘FPA Letter
II’’); IAA Letter; SIFMA Letter I; Comment Letter of
the Securities Industry and Financial Markets
Association (Aug. 21, 2009) (‘‘SIFMA Letter II’’);
DPW Letter; NAPFA Letter.
42 FPA Letter I; IAA Letter; NAPFA Letter.
43 DPW Letter; SIFMA Letter I.
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the temporary rule for two years in light
of pending legislation that could
address principal trading by investment
advisers.44 The Financial Planning
Association (FPA) also wrote
recommending allowing the rule to
expire or extending it for no more than
an additional year while the
Commission conducts a study that
either substantiates a clear basis for
adopting a permanent exemption under
Section 206(3) or disproves the view of
firms that it affords unique benefits to
the public.45
c. Limited Extension of Temporary Rule
When we adopted Rule 206(3)–3(T)
on a temporary basis in September 2007,
we anticipated the two-year period
would provide us with adequate time to
evaluate the operation of the rule in the
marketplace and determine, in
conjunction with consideration of all
comments received, whether the rule
should be made permanent, modified or
allowed to expire. At the time we
adopted the interim final rule, we
explained that we would need to take
action no later than the end of the
original duration of the temporary rule
if we intended to continue the same or
similar relief.46
We need additional time to
understand how, and in what situations,
advisers are using the rule. Fewer firms
than we anticipated at the time we
adopted the rule on an interim final
basis immediately determined to rely on
it and those that did were slower than
expected to implement the rule. We take
seriously the investor protection
concerns raised by commenters.
Consequently, we have determined to
limit the duration of the extension to
one year while we continue to evaluate
the operation of the rule. As our staff
continues to gather information, we will
assess whether the rule is operating, and
firms are applying it, in a manner
consistent with protecting investors.
Given the limited nature of the
extension, we believe that making other
changes to the temporary rule could
cause firms relying on the rule to need
to make adjustments to their disclosure
documents, client agreements,
procedures, or systems that, depending
on whether we determine to propose
and adopt a permanent rule in the
future, may be applicable for only a
year.
Further evaluation will help inform
our decision whether to propose to
make the rule permanent in its current
44 SIFMA
Letter II.
Letter II.
46 See 2007 Principal Trade Rule Release, Section
II.B.9.
45 FPA
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or an amended form or to allow it to
expire.47 We will consider, among other
things, the comments we received on
the interim final rule in deciding
whether to propose a permanent rule or
to let the rule expire. If we decide to
propose a permanent rule, we will also
consider the comments we received in
determining how such a rule might
differ from Rule 206(3)–T.
In addition, there are currently
pending before both houses of Congress
bills that may address, or otherwise
have an impact on, principal trading
activities by investment advisers and
broker-dealers, as well as broader issues
under the Advisers Act.48 Waiting some
additional time for Congress to act will
permit us to consider the impact that
any of those proposals, if enacted, will
have on such activities prior to taking
further action with respect to the
temporary rule.
For the reasons discussed in this
release, we have determined that it is
necessary or appropriate in the public
interest and consistent with the
protection of investors and consistent
with the purposes fairly intended by the
policy and provisions of the Advisers
Act to adopt Rule 206(3)–T as a final
temporary rule. We are adopting Rule
206(3)–3T in the same form in which we
originally adopted it on an interim final
basis, except that it will expire on
December 31, 2010, one year after its
original expiration date.
III. Certain Administrative Law Matters
The amendment to Rule 206(3)–3T is
effective on December 30, 2009. The
Administrative Procedure Act generally
requires that an agency publish a final
rule in the Federal Register not less
than 30 days before its effective date.49
However, this requirement does not
apply if the rule is a substantive rule
which grants or recognizes an
exemption or relieves a restriction, or if
the rule is interpretive.50 Rule 206(3)–
3T in part has interpretive aspects and
47 Subsequent to adopting Rule 206(3)–3T, the
study prepared by RAND Corporation was
completed. See Investor and Industry Perspectives
on Investment Advisers and Broker-Dealers,
https://www.sec.gov/news/press/2008/20081_randiabdreport.pdf. The study addressed two
primary questions: (1) What are the current
business practices of broker-dealers and investment
advisers; and (2) do investors understand the
differences between and relationships among
broker-dealers and investment advisers? Several of
the bills currently pending before Congress are
designed to harmonize the separate regulatory
regimes for investment advisers and broker-dealers.
48 See, e.g., Investor Protection Act of 2009, H.R.
3817, 111th Cong. (2009); Restoring American
Financial Stability Act of 2009, S. __ 111th Cong.
(2009).
49 5 U.S.C. 553(d).
50 5 U.S.C. 553(d)(1) and (2).
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is a rule that recognizes an exemption
and relieves a restriction.
IV. Paperwork Reduction Act
Rule 206(3)–3T contains ‘‘collection
of information’’ requirements within the
meaning of the Paperwork Reduction
Act of 1995.51 The Office of
Management and Budget (‘‘OMB’’)
approved the burden estimates
presented in the 2007 Principal Trade
Rule Release,52 first on an emergency
basis and subsequently on a regular
basis. OMB approved the collection of
information with an expiration date of
March 31, 2011. An agency may not
conduct or sponsor, and a person is not
required to respond to, a collection of
information unless it displays a
currently valid OMB control number.
The title for the collection of
information is: ‘‘Temporary rule for
principal trades with certain advisory
clients, rule 206(3)–3T’’ and the OMB
control number for the collection of
information is 3235–0630.
The 2007 Principal Trade Rule
Release explains that, under Rule
206(3)–3T, there are four distinct
collection burdens. Our estimate of the
burden of each of the collections reflects
the fact that the alternative means of
compliance provided by the rule is
substantially similar to the approach
advisers currently employ to comply
with the disclosure and consent
obligations of Section 206(3) of the
Advisers Act and the approach that
broker-dealers employ to comply with
the confirmation requirements of Rule
10b–10 under the Exchange Act. The
2007 Principal Trade Rule Release
solicited comments on our PRA
estimates,53 but we did not receive
comment on them. The amendment to
the rule we are adopting today—to
extend the rule for twelve months—does
not affect the burden estimates
contained in the 2007 Principal Trade
Rule Release.54
V. Cost-Benefit Analysis
We are adopting, as a final temporary
rule, Rule 206(3)–3T under the Advisers
Act, which provides an alternative
means for investment advisers that are
registered with us as broker-dealers to
meet the requirements of Section 206(3)
51 44
U.S.C. 3501 et seq.
2007 Principal Trade Rule Release, Section
52 See
V.B&C.
53 See id., Section V.D.
54 As discussed above, fewer firms than we
anticipated at the time we adopted the rule on an
interim final basis immediately determined to rely
on it and those that did were slower than expected
in implementing it. We received no comments on
our estimate of the number of advisers or accounts
and, for purposes of this release, are retaining those
estimates.
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Federal Register / Vol. 74, No. 249 / Wednesday, December 30, 2009 / Rules and Regulations
when they act in a principal capacity
with respect to transactions with certain
of their advisory clients. Other than
extending the sunset period of the
temporary rule for one year, we are not
otherwise modifying the rule from the
form in which we initially adopted it on
an interim final basis in September
2007.
In summary, as explained in the 2007
Principal Trade Rule Release,55 we
believe the principal benefit of Rule
206(3)–3T is that it maintains investor
choice and protects the interests of
investors who held an estimated $300
billion in one million fee-based
brokerage accounts. A resulting second
benefit of the rule is that nondiscretionary advisory clients of
advisory firms that are also registered as
broker-dealers have easier access to a
wider range of securities which, in turn,
should lead to increased liquidity in the
markets for these securities and promote
capital formation in these areas. A third
benefit of the rule is that it provides the
protections of the sales practice rules of
the Exchange Act and the relevant selfregulatory organizations because an
adviser relying on the rule must also be
a registered broker-dealer. Another
benefit of Rule 206(3)–3T is that it
provides a lower cost alternative for an
adviser to engage in principal
transactions.
We believe there are some benefits
associated with extension of the rule for
one year. By extending the rule for one
year, non-discretionary advisory clients
who have had access to certain
securities because of their advisers’
reliance on the rule to trade on a
principal basis will continue to have
access to those securities without
disruption. Firms relying on the rule
will continue to be able to offer clients
and prospective clients access to certain
securities on a principal basis as well
and will not need during this one-year
period to incur the cost of adjusting to
a new set of rules or abandoning the
systems established to comply with the
current rule. In other words, extension
will avoid disruption to clients and
firms during the period while we
consider whether to make the rule
permanent in its current form or in a
modified form or to let it expire.
As discussed in the 2007 Principal
Trade Rule Release,56 we presented
estimates of the costs of each of the
rule’s disclosure elements, including:
the prospective disclosure and consent;
55 For a complete discussion of the benefits for
Rule 206(3)–3T, see 2007 Principal Trade Rule
Release, Section VI.
56 See 2007 Principal Trade Rule Release, Section
VI.D.
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15:16 Dec 29, 2009
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transaction-by transaction disclosure
and consent; transaction-by-transaction
confirmations; and the annual report of
principal transactions. We also provided
estimates for the following related costs
of compliance with Rule 206(3)–3T: (i)
The initial distribution of prospective
disclosure and collection of consents;
(ii) systems programming costs to
ensure that trade confirmations contain
all of the information required by the
rule; and (iii) systems programming
costs to aggregate already-collected
information to generate compliant
principal transactions reports.57 Finally,
we solicited comment on, and requested
data to assist us in further developing,
our cost and benefit estimates.58
We did not receive comments directly
addressing with supporting data the
cost-benefit analysis we presented in the
2007 Principal Trade Rule Release and
we continue to believe that our
estimates reflect the likely costs an
adviser would incur to rely on the
rule.59 Several of the comments
described above, however, relating to
the utility of specific disclosure
provisions, along with an additional
comment regarding the potential effect
of the rule on small firms, do have
bearing on our cost-benefit analysis of
the rule. In particular, one commenter
argued that the costs of transaction-bytransaction notice and consent for
sophisticated investors may outweigh
the benefits.60 This commenter
suggested that the rule expressly permit
negative consent for principal trading
because the costs for certain clients who
must locate and contact an authorized
person to sign an affirmative consent on
behalf of the client on a timely basis
may outweigh the benefits.61 Another
commenter expressed doubt that the
benefit of the transaction-by-transaction
confirmation requirement would
outweigh the costs of revising and
further burdening the standard
confirmation form, especially given the
rule’s other disclosure and consent
57 We note that the rule provides an alternative
means of compliance with Section 206(3) of the
Advisers Act. Therefore, there is no requirement
that any adviser rely on it. We believe that it is
reasonable to assume that only those advisers that
conclude that the benefits in aggregate outweigh the
aggregate costs of relying on the rule would choose
to do so.
58 See 2007 Principal Trade Rule Release, Section
VI.
59 As discussed above, fewer firms than we
anticipated at the time we adopted the rule on an
interim final basis immediately determined to rely
on it. We received no comments on our estimate of
the number of advisers or accounts and, for
purposes of this release, are retaining our original
estimates.
60 DPW Letter.
61 Id.
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69013
requirements.62 Another commenter
argued that limiting the availability of
the rule to advisers that also are
registered as broker-dealers imposes
substantial regulatory burdens that are
not justified by corresponding investor
protection benefits.63 We recognize
these commenters’ concerns and will
consider them, as well as all the other
comments we have received, if we
determine to propose to make the rule
permanent in its current or a modified
form. For purposes of the limited
extension at issue here, however, we
believe the costs of adjustments to
practices and systems that may or may
not be continued or necessary under a
potential, future permanent rule would
not be justified at this time.64
We acknowledge that firms relying on
the rule would incur operational costs
associated with complying with the rule
for one year. We believe that the
estimates of the costs we outlined were
reasonable, and no commenter provided
specific, alternative estimates. We
believe that the benefits were
appropriately identified. We believe that
all the costs and benefits associated
with the rule—which, as noted above,
the purpose of which was to permit
broker-dealers to sell to their nondiscretionary advisory clients 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) should be
considered in aggregate. The particular
array of disclosure requirements and
limitations contained in the rule was
tailored to safeguard investor protection
and counterbalance investor protection
concerns that might stem from the rule’s
allowance for transaction-by-transaction
notice and consent to principal trades to
be delivered orally or in written form,
instead of just in written form. We
believe that, for purposes of this oneyear extension of the rule, these overall
benefits justify the costs associated with
the rule.
VI. Promotion of Efficiency,
Competition, and Capital Formation
Section 202(c) of the Advisers Act
mandates that the Commission, when
engaging in rulemaking that requires it
to consider or determine whether an
action is necessary or appropriate in the
public interest, consider, in addition to
the protection of investors, whether the
62 FD/CFA
Letter.
Committee Letter.
64 See Section II.C. of this Release.
63 ABA
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Federal Register / Vol. 74, No. 249 / Wednesday, December 30, 2009 / Rules and Regulations
action will promote efficiency,
competition, and capital formation.65
As we explained in the 2007 Principal
Trade Rule Release, Rule 206(3)–3T may
increase efficiency by providing an
alternative means of compliance with
Section 206(3) of the Advisers Act that
we believe will be less costly and less
burdensome.66 By permitting oral
transaction-by-transaction disclosure,
advisers may be more willing to engage
in principal trades with advisory clients
leading advisers to provide access to
certain securities the adviser or its
affiliate has in inventory. As we noted
in the 2007 Principal Trade Rule
Release, firms have argued that making
securities available to clients through
principal trades could lead to faster or
less expensive execution, advantages a
client may deem to outweigh the risks
presented by principal trading with an
adviser.67
We further explained our expectation
that Rule 206(3)–3T will promote
competition because it preserves
investor choice for different types of
advisory accounts and that, if Rule
206(3)–3T has any effect on capital
formation, it is likely to be positive,
although indirect.68 We also described
our understanding that providing an
alternative to the traditional
requirements of transaction-bytransaction written disclosure might
serve to broaden the potential universe
of purchasers of securities, in particular
investment grade debt securities, for the
reasons described in the 2007 Principal
Trade Rule Release, opening the door to
greater investor participation in the
securities markets with a potential
positive effect on capital formation.69
Some commenters, while expressing
support for the goal of affording
investors engaged in principal
transactions the protections of both the
investment adviser regulatory regime
(i.e., the Advisers Act and rules
thereunder) and the broker-dealer
regulatory regime (i.e., the Exchange Act
and rules thereunder and the rules of
applicable SROs), opposed the
limitation of the temporary rule not only
to investment advisers that are also
registered as broker-dealers, but also to
accounts that are subject to both the
Advisers Act and Exchange Act.70 One
65 15
U.S.C. 80b–2(c).
Principal Trade Rule Release, Section VII.
66 2007
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67 Id.
68 Id.
69 Id.,
Section II.B.2.
e.g., FPA Letter I; ABA Committee Letter;
SIFMA Letter I. Another commenter commented
upon potential anti-competitive aspects of the rule,
in particular as it relates to a proposed (but not
adopted) interpretive rule that was proposed on the
same day Rule 206(3)–3T was adopted on an
70 See,
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15:16 Dec 29, 2009
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of these commenters specifically argued
that these limitations are unnecessary,
contending they provide no additional
protection for investors engaging in
principal transactions because any
principal trades conducted for an
advisory account would be subject to
the Exchange Act and SRO rules
anyway.71 This commenter concluded
that the limitation instead merely
provides a competitive advantage to
investment advisers that are also
registered broker-dealers.72
We intend to continue to evaluate the
effects of the rule on efficiency,
competition and capital formation as we
consider whether to propose to extend
or modify the rule or allow it to expire.
As discussed above, we have no reason
to believe, based on our experience with
the rule to date, that small brokerdealers (or affiliated but separate
investment advisers and broker-dealers)
are put at a competitive disadvantage to
larger advisers that are themselves also
registered as broker-dealers. We believe
that the effects on efficiency,
competition and capital formation of
Rule 206(3)–3T as it was adopted on an
interim final basis warrant its continued
operation for the additional limited
period of time. We anticipate no new
effects on efficiency, competition and
capital formation as a result of the oneyear extension. During that time, we
will continue to assess the rule’s
operation and impact along with
intervening developments.
VII. Final Regulatory Flexibility Act
Analysis
A final regulatory flexibility analysis
(‘‘FRFA’’) was prepared in accordance
with 5 U.S.C. 603 when Rule 206(3)–3T
was adopted in September 2007. In the
2007 Principal Trade Rule Release, we
analyzed: (i) The need for and objectives
of the rule; (ii) an estimate of small
entities subject to the rule; (iii) the rule’s
interim final basis. IASBDA Letter. See also note 19
above. Because those comments relate more directly
to the proposed interpretive rule, they will be
considered in conjunction with that interpretive
rulemaking.
71 FPA Letter I (arguing that a client engaging in
a principal trade enjoys the benefits of two
regulatory regimes regardless of whether the client’s
adviser is itself both an investment adviser and a
broker-dealer for purposes of the Federal securities
laws or instead affiliated with a separate brokerdealer with which the client engages in the trade
on a principal basis because, in the first instance,
a single firm is responsible for meeting all
regulatory requirements (including those of the
Commission and the relevant SRO) and in the
second, one firm holds the broad fiduciary duties
of an adviser (and is subject to Commission
oversight), while the affiliated broker-dealer must
still comply with the Commission’s and relevant
SRO’s sales practice and best execution
requirements).
72 Id.
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Fmt 4700
Sfmt 4700
projected reporting, recordkeeping and
other compliance requirements; (iv)
agency action to minimize the effect on
small entities; (v) duplicative,
overlapping or conflicting Federal rules;
and (vi) significant alternatives. We
sought comment on each of these
aspects of our FRFA.
As discussed above, several
commenters objected to the condition
that advisers seeking to rely on the rule
must also be registered as broker-dealers
and that each account must be subject
to both the Advisers Act and the
Exchange Act (and applicable SRO
rules). Some contended that the burdens
of requiring application of both
regulatory regimes do not outweigh the
benefits.73 Others essentially argued
that limiting the availability of the relief
under the rule to advisers also registered
as broker-dealers might be anticompetitive.74 With respect to small
entities in particular, one commenter
suggested that the alternative means of
compliance with the Advisers Act’s
principal trading restrictions made
available by Rule 206(3)–3T (in
particular, when considered in
conjunction with the interpretive rule
proposed on the same day),75 would
disadvantage small broker-dealers
because they are less likely to also be
registered as an investment adviser, and
as a result would have to form an
adviser to take advantage of the benefits
of the rule.76
We specifically considered and
discussed these issues in the final
regulatory flexibility analysis in the
2007 Principal Trade Rule Release and
believe that it is appropriate to continue
this condition of the rule for the limited
extension. As explained above,
however, we expect to continue to
consider these comments in conjunction
with data our staff gathers on the
operation of the rule in the marketplace,
no later than the end of the rule’s
revised termination date if the
Commission intends to propose to
continue the same or similar relief.
VIII. Statutory Authority
The Commission is adopting Rule
206(3)–3T pursuant to Sections 206A
and 211(a) of the Advisers Act.
Text of Rule
List of Subjects in 17 CFR Part 275
Investment advisers, Reporting and
recordkeeping requirements.
■ For the reasons set out in the
preamble, Title 17, Chapter II of the
73 See
notes 35–36 and accompanying text above
notes 70–72 and accompanying text above.
75 See note 19 above.
76 IASBDA Letter.
74 See
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Federal Register / Vol. 74, No. 249 / Wednesday, December 30, 2009 / Rules and Regulations
Code of Federal Regulations is amended
as follows:
PART 275—RULES AND
REGULATIONS, INVESTMENT
ADVISERS ACT OF 1940
1. The general authority citation for
Part 275 continues to read as follows:
■
Authority: 15 U.S.C. 80b–2(a)(11)(G), 80b–
2(a)(17), 80b–3, 80b–4, 80b–4a, 80b–6(4),
80b–6a, and 80b–11, unless otherwise noted.
*
*
*
*
*
2. Section 275.206(3)–3T(d) is revised
to read as follows:
■
§ 275.206(3)–3T Temporary rule for
principal trades with certain advisory
clients.
(d) This section will expire and no
longer be effective on December 31,
2010.
Dated: December 23, 2009.
By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. E9–30877 Filed 12–29–09; 8:45 am]
BILLING CODE 8011–01–P
DEPARTMENT OF HOMELAND
SECURITY
Bureau of Customs and Border
Protection
DEPARTMENT OF THE TREASURY
19 CFR Parts 111, 113, 141, 142 and
143
[CBP Dec. 09–47; USCBP–2006–0001]
RIN 1505–AB20
Remote Location Filing
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AGENCIES: U.S. Customs and Border
Protection, Department of Homeland
Security; Department of the Treasury.
ACTION: Final rule.
SUMMARY: This document adopts as a
final rule, with changes, the proposed
amendments to title 19 of the Code of
Federal Regulations (19 CFR) regarding
Remote Location Filing (RLF). RLF is a
planned component of the National
Customs Automation Program (NCAP),
authorized by section 414 of the Tariff
Act of 1930, as added by section 631
within the Customs Modernization
provisions of the North American Free
Trade Agreement Implementation Act.
RLF allows a participating NCAP filer to
electronically file with CBP those
consumption entries and related
information that CBP can process in a
completely electronic data interchange
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15:16 Dec 29, 2009
Jkt 220001
system from a location other than where
the goods will arrive in the United
States.
DATES: Effective Date: January 29, 2010.
FOR FURTHER INFORMATION CONTACT: For
systems or automation issues: Tony
Casucci, Office of Information
Technology, at (703) 650–3053. For
operational or policy issues: Cynthia
Whittenburg, Trade Policy and
Programs, Office of International Trade,
at (202) 863–6512 or via e-mail at
remote.filing@dhs.gov.
SUPPLEMENTARY INFORMATION:
Background
On March 23, 2007, CBP published in
the Federal Register (72 FR 13714) a
proposal to implement Remote Location
Filing (RLF) regulations in a new
subpart E to part 143 within title 19 of
the Code of Federal Regulations (19 CFR
part 143, subpart E).
RLF, which currently operates as a
National Customs Automation Program
(NCAP) prototype test pursuant to
section 414 of the Tariff Act of 1930, as
added by section 631 within the
Customs Modernization provisions of
the North American Free Trade
Agreement Implementation Act, allows
an RLF filer to electronically file with
U.S. Customs and Border Protection
(CBP) those consumption entries and
related information that CBP can
process in a completely electronic data
interchange system from a location
other than where the goods will arrive
in the United States.
As noted in 72 FR 13714, the RLF
prototype will terminate upon the
effective date of this final rule. RLF
prototype participants may continue to
participate in the NCAP test program
until this date.
CBP solicited comments on the
proposed rulemaking.
Discussion of Comments
Fourteen commenters responded to
the solicitation of public comment in
the proposed rule. A description of the
comments received, together with CBP’s
analyses, is set forth below.
Comment: Proposed § 143.44(c)
describes RLF automation requirements
as encompassing only those entries and
entry summaries that CBP processes
completely in an electronic data
interchange system. Three commenters
requested that, in the final rule, CBP
either specifically list the RLF-eligible
entry types or cite to a source for such
information.
CBP Response: Currently, only
electronically transmitted consumption
entries—entry types 01 and 11—may be
filed using RLF. CBP is presently
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69015
working to expand the entry types that
may be processed via RLF. It is
anticipated that upon the total
integration of the major cargo and entry
summary functionalities into
Automated Commercial Environment
(ACE), the expansion of RLF will be
fully realized and will incorporate most
entry types.
As the entry types currently permitted
under RLF are expanded in the future,
CBP will not list them in the regulatory
text; rather, CBP will include a reference
in the regulatory text, at § 143.44(c), to
the Web site located at https://
www.cbp.gov/xp/cgov/trade/
trade_programs/remote_location_filing/
that provides a current listing of
permissible RLF entry types.
Comment: Four commenters
requested that RLF permit the filing of
all entry types (including anti-dumping,
countervailing duty, and quota entries),
and not be limited to type 01 and 11
consumption entries. One of the
commenters also suggested that CBP
create a special class of National Permit
to allow a broker to file any type of
entry in RLF.
CBP Response: As noted in the
response to the previous comment, it is
anticipated that most entry types will be
permitted under RLF at such time as the
major cargo and entry summary
functionalities are totally integrated into
ACE. For this reason, the creation of a
special class of National Permit is
unnecessary.
Comment: One commenter requested
that all brokers meeting the criteria set
forth in proposed § 143.43 should have
their filer codes centrally ‘‘turned on’’
automatically in the Automated
Commercial System (ACS) for all
eligible RLF ports instead of having
their Automated Broker Interface (ABI)
Client Representatives enter them as
needed.
CBP Response: The current ACS
environment does not provide this
capability. Coordination with the ABI
Client Representative is required to
enable a broker to file remotely at a
specific port.
Comment: Two commenters requested
additional clarification regarding the
specific criteria used by CBP in
establishing RLF-operational locations.
CBP Response: CBP continually
reviews and makes determinations
concerning the addition of new ports to
the list of RLF-approved processing
locations. A prospective port must, at a
minimum, have appropriate electronic
entry processing capabilities. In
determining whether to make a port
RLF-operational, CBP may take into
consideration factors such as trade
interest and whether CBP personnel
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]]>Agencies
[Federal Register Volume 74, Number 249 (Wednesday, December 30, 2009)]
[Rules and Regulations]
[Pages 69009-69015]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-30877]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 275
[Release No. IA-2965; File No. S7-23-07]
RIN 3235-AJ96
Temporary Rule Regarding Principal Trades With Certain Advisory
Clients
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Securities and Exchange Commission is adopting as final
Rule 206(3)-3T under the Investment Advisers Act of 1940, the interim
final temporary rule that establishes an alternative means for
investment advisers who are registered with the Commission 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. As adopted, the only change to the
rule is the expiration date. Rule 206(3)-3T will sunset on December 31,
2010.
DATES: Effective Date: December 30, 2009.
FOR FURTHER INFORMATION CONTACT: Sarah A. Bessin, Assistant Director,
Daniel S. Kahl, Branch Chief, or Matthew N. Goldin, Senior Counsel, at
(202) 551-6787 or IArules@sec.gov, Office of Investment Adviser
Regulation, Division of Investment Management, Securities and Exchange
Commission, 100 F Street, NE., Washington, DC 20549-5041.
SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission is
adopting as final temporary Rule 206(3)-3T [17 CFR 275.206(3)-3T] under
the Investment Advisers Act of 1940 [15 U.S.C. 80b].
I. Background
On September 24, 2007, we adopted, on an interim final basis, Rule
206(3)-3T, a temporary rule under the Investment Advisers Act of 1940
(the ``Advisers Act'') that provides an alternative means for
investment advisers who are registered with us as broker-dealers to
meet the requirements of Section 206(3) of the Advisers Act when they
act in a principal capacity in transactions with certain of their
advisory clients.\1\ 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''),\2\ 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 \3\--while protecting clients from
conflicts of interest as a result of such transactions.\4\
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\1\ Rule 206(3)-3T [17 CFR 275.206(3)-3T]. All references to
Rule 206(3)-3T and the various sections thereof in this Release are
to 17 CFR 275.206(3)-3T and its corresponding sections. See also
Temporary Rule Regarding Principal Trades with Certain Advisory
Clients, Investment Advisers Act Release No. 2653 (Sep. 24, 2007)
[72 FR 55022 (Sep. 28, 2007)] (``2007 Principal Trade Rule
Release'').
\2\ 482 F.3d 481 (D.C. Cir. 2007). In the FPA Decision, handed
down on March 30, 2007, the Court of Appeals for the District of
Columbia Circuit vacated (subject to a subsequent stay until October
1, 2007) Rule 202(a)(11)-1 under the Advisers Act. Rule 202(a)(11)-1
provided, among other things, that fee-based brokerage accounts were
not advisory accounts and were thus not subject to the Advisers Act.
For further discussion of fee-based brokerage accounts, see 2007
Principal Trade Rule Release, Section I.
\3\ See 2007 Principal Trade Rule Release at nn.19-20 and
Section VI.C.
\4\ As a consequence of the FPA Decision, broker-dealers
offering fee-based brokerage accounts became subject to the Advisers
Act with respect to those accounts, and the client relationship
became fully subject to the Advisers Act. These broker-dealers--to
the extent they wanted to continue to offer fee-based accounts and
met the requirements for registration--had to register as investment
advisers, if they had not done so already, act as fiduciaries with
respect to those clients, disclose all material conflicts of
interest, and otherwise fully comply with the Advisers Act,
including the restrictions on principal trading contained in Section
206(3) of the Act. See 2007 Principal Trade Rule Release, Section I.
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The rule vacated in the FPA Decision had allowed broker-dealers to
offer fee-based accounts without complying with the Advisers Act,
including the requirements of Section 206(3). Section 206(3) makes is
unlawful for any investment adviser, directly or indirectly, ``acting
as a principal for his own account, knowingly to sell any security to
or to purchase any security from a client * * *, without disclosing to
such client in writing before the completion of such transaction the
[[Page 69010]]
capacity in which he is acting and obtaining the consent of the client
to such transaction.'' \5\ Prior to our adoption of Rule 206(3)-3T,
several firms that had offered fee-based brokerage accounts informed
our staff that the written disclosure and the client consent
requirements of Section 206(3) act as an operational barrier to their
ability to engage in principal trades with their clients. Most informed
us that they planned to discontinue fee-based brokerage accounts as a
result of the FPA decision. They explained that they planned to do so
because of the application of the Advisers Act and that, unless they
were provided an exemption from (or an alternative means of complying
with) Section 206(3), they would be unable to provide the same range of
services to those fee-based brokerage customers who elected to become
advisory clients and would expect few to elect to do so.
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\5\ 15 U.S.C. 80b-6(3) (emphasis added). See also 2007 Principal
Trade Rule Release, Section II.A.
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Rule 206(3)-3T was designed to continue to provide the protection
of transaction-by-transaction disclosure and consent \6\ to advisory
clients when investment advisers seek to trade with them on a principal
basis, subject to several conditions.\7\ Specifically, Rule 206(3)-3(T)
permits an adviser, with respect to non-discretionary advisory
accounts,\8\ to comply with Section 206(3) of the Advisers Act by,
among other things, meeting the following conditions:
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\6\ Rule 206(3)-3T(a)(4). See also 2007 Principal Trade Rule
Release, Section II.B.4.
\7\ For a discussion of Section 206(3) of the Advisers Act, its
legislative history and our past interpretations of it, see the 2007
Principal Trade Rule Release, Section II.A.
\8\ For purposes of the rule, the term ``investment discretion''
has the same meaning as in Section 3(a)(35) of the Exchange Act [15
U.S.C. 78c(a)(35)], except that it excludes investment discretion
granted by a customer on a temporary or limited basis. Rule 206(3)-
3T(a)(1). See also 2007 Principal Trade Rule Release at n. 31.
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(i) Providing written, prospective disclosure regarding the
conflicts arising from principal trades; \9\
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\9\ Rule 206(3)-3T(a)(3). See also 2007 Principal Trade Rule
Release, Section II.B.3.
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(ii) Obtaining written, revocable consent from the client
prospectively authorizing the adviser to enter into principal
transactions; \10\
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\10\ Rule 206(3)-3T(a)(3). Rule 206(3)-3T also requires an
adviser seeking to rely on the rule to include with each written
disclosure required by the rule a conspicuous, plain English
statement that the client may revoke the prospective, written
consent without penalty at any time by written notice to the
investment adviser. Rule 206(3)-3T(a)(8). See also 2007 Principal
Trade Rule Release, Section II.B.3.
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(iii) Making certain disclosures, either orally or in writing, and
obtaining the client's consent before each principal transaction; \11\
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\11\ Rule 206(3)-3T(a)(4). See also 2007 Principal Trade Rule
Release, Section II.B.4.
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(iv) Sending to the client confirmation statements disclosing the
capacity in which the adviser has acted and disclosing that the adviser
informed the client that it may act in a principal capacity and that
the client authorized the transaction; \12\ and
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\12\ Rule 206(3)-3T(a)(5). See also 2007 Principal Trade Rule
Release, Section II.B.5.
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(v) Delivering to the client an annual report itemizing the
principal transactions made during the year.\13\
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\13\ Rule 206(3)-3T(a)(6). See also 2007 Principal Trade Rule
Release, Section II.B.6.
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The rule also requires that the investment adviser be registered as
a broker-dealer under Section 15 of the Securities Exchange Act of 1934
(the ``Exchange Act'') [15 U.S.C. 78o] and that each account for which
the adviser relies on the rule be a brokerage account subject to the
Exchange Act, and the rules thereunder, and the rules of the self-
regulatory organization(s) (``SRO'') of which it is a member.\14\ The
rule is not available for principal trades of securities if the
investment adviser or a person who controls, is controlled by, or is
under common control with the adviser (``control person'') is the
issuer or is an underwriter of the security.\15\ The rule includes one
exception--an adviser may rely on the rule for trades in which the
adviser or a control person is an underwriter of non-convertible
investment-grade debt securities.\16\ Rule 206(3)-3T(b) clarifies that
the rule does not relieve in any way an investment adviser from its
obligation to act in the best interests of each of its advisory
clients, including fulfilling the duty with respect to the best price
and execution for a particular transaction for the advisory client.\17\
Rule 206(3)-3T was set to expire on December 31, 2009, approximately 27
months after its adoption.\18\
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\14\ Rule 206(3)-3T(a)(7). See also 2007 Principal Trade Rule
Release, Section II.B.7.
\15\ Rule 206(3)-3T(a)(2). See also 2007 Principal Trade Rule
Release, Section II.B.2.
\16\ Rule 206(3)-3T(a)(2). See also 2007 Principal Trade Rule
Release, Section II.B.2. A separate Commission rulemaking may have
an impact on the rule's definition of ``non-convertible investment
grade debt securities.'' See note 34 below.
\17\ Rule 206(3)-3T(b). See also 2007 Principal Trade Rule
Release, Section II.B.8.
\18\ Rule 206(3)-3T(d). See also 2007 Principal Trade Rule
Release, Section II.B.9.
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II. Discussion
We are adopting Rule 206(3)-3T in the same form in which we adopted
it on an interim final basis in 2007, except that the sunset period of
the rule will end one year later (on December 31, 2010). Absent further
action by the Commission, Rule 206(3)-3T will expire on December 31,
2010. As we continue to assess the operation of the rule along with
intervening developments, we believe that the substantive provisions of
Rule 206(3)-3T as it was adopted on an interim final basis provide
sufficient protections to advisory clients to warrant its continued
operation for an additional limited period of time. We will use that
time to consider whether to propose to continue the rule beyond the
revised sunset date and, if so, what if any modifications should be
made to the rule.
a. Comments on the Scope and Conditions of the Rule
We received comment letters from eight commenters on the interim
final rule.\19\ Several favored narrowing the scope of the exemption
provided by the rule or opposed its expansion.\20\ Others, however,
urged us to expand the rule's exemption to cover additional
securities.\21\ Some commenters suggested that an adviser be prohibited
from relying on the rule when trading any securities underwritten or
issued by the adviser or any of its affiliates (i.e., that we exclude
underwritten non-convertible investment grade debt securities).\22\
Others asked that we allow advisers, in reliance on the rule, to engage
in principal trades with clients in various types of securities the
adviser or an affiliate underwrote that are highly liquid and for which
ascertainable prices are readily available.\23\
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\19\ The comment letters are available at https://www.sec.gov/comments/s7-23-07/s72307.shtml. However, one additional comment
letter was submitted in connection with our proposed Interpretive
Rule under the Advisers Act Affecting Broker-Dealers, Investment
Advisers Act Release No. 2652 (Sep. 24, 2007). International
Association of Small Broker Dealers and Advisers (Oct. 25, 2007)
(``IASBDA Letter.'') The IASBDA Letter addresses one particular
aspect of the rule, as noted below, and is available at https://www.sec.gov/comments/s7-22-07/s72207-3.pdf.
\20\ See, e.g., Comment Letter of the Financial Planning
Association (Nov. 30, 2007) (``FPA Letter I''); Comment Letter of
the National Association of Personal Financial Advisors (Nov. 30,
2007) (``NAPFA Letter'').
\21\ See, e.g., Comment Letter of the Securities Industry and
Financial Markets Association (Nov. 30, 2007) (``SIFMA Letter I'');
Comment Letter of Davis Polk & Wardwell (Dec. 4, 2007) (``DPW
Letter'').
\22\ See, e.g., Comment Letter of Fund Democracy and the
Consumer Federation of America (Nov. 30, 2007) (``FD/CFA Letter'').
\23\ See, e.g., SIFMA Letter I.
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Some commenters generally viewed the protections afforded to
clients under the rule as inadequate,\24\ while others urged us to
modify the rule to make it easier for advisers to effect principal
[[Page 69011]]
transactions with their clients.\25\ For example, one commenter urged
us to limit the rule's relief to principal transactions with
sophisticated or wealthy investors who are in a position to protect
themselves.\26\ Another suggested the rule expressly require firms to
develop policies and procedures that are specifically designed to
detect, deter and prevent disadvantageous principal transactions.\27\
And others suggested that we require that the disclosure supporting the
initial client authorization for principal trades be in a separately
executed, stand-alone document and not permit it to be incorporated
directly into an account opening agreement.\28\ Some commenters
asserted, however, that the disclosure requirements--in particular,
requiring transaction-by-transaction disclosures for principal trades
with sophisticated investors--were too restrictive,\29\ while others
argued that they did not go far enough.\30\ Some commenters suggested
we impose additional disclosures or disclosure-related
requirements.\31\ One commenter questioned the rule's overall focus on
disclosure and urged us to consider instead requiring affirmative
measures designed to prevent principal trading abuses.\32\
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\24\ See, e.g., NAPFA Letter.
\25\ See, e.g., DPW Letter.
\26\ FPA Letter I.
\27\ FD/CFA Letter.
\28\ See, e.g., FD/CFA Letter; NAPFA Letter; FPA Letter I.
\29\ See, e.g., DPW Letter (although supporting the rule,
commenting that the Commission should provide more relief from the
restrictions of Section 206(3) to permit affirmative waiver of the
transaction-by-transaction disclosure and consent requirements with
respect to transactions with financially sophisticated investors
involving certain ``readily marketable'' securities).
\30\ See, e.g., Comment Letter of the Investment Advisers
Association (Nov. 30, 2007) (``IAA Letter'') (expressing strong
opposition to any expansion of the relief provided in the rule, or
relaxation of the rule's conditions, and emphasizing the importance
of monitoring the rule in practice before making further changes);
FPA Letter I (expressing concern about the risks attendant to
principal trades); NAPFA Letter (arguing that any expansion of the
scope of the rule would be inappropriate because of the potential
risks associated with principal trades).
\31\ See, e.g., FD/CFA Letter; FPA Letter I (expressing concern
that the transaction-specific disclosures required by the rule may
not provide investors with enough information regarding conflicts of
interest and suggested additional disclosures that should be
required by the rule).
\32\ See note 27 above and accompanying text.
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Commenters who addressed the issue generally agreed with our view
that principal trades in securities issued or underwritten by an
adviser or its control persons should not be permitted under the
rule.\33\ However, these commenters expressed differing views with
respect to the rule's exception from the general prohibition for trades
in which the adviser or control person is an underwriter of non-
convertible investment grade debt securities.\34\ We also received
mixed comments on the rule's limitation of relief to investment
advisers that are registered with the Commission as broker-dealers.
Some commenters, generally those representing financial institutions
that act as both advisers and broker-dealers, supported the limitation
\35\ while others opposed it.\36\
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\33\ See, e.g., FD/CFA Letter; FPA Letter I; SIFMA Letter I.
\34\ Compare SIFMA Letter I (arguing that we should expand the
exception to underwritten preferred stock, convertible debt, and
certificates of deposit (among others)) with FPA Letter I
(specifically urging us not to extend the exception to debt
instruments other than investment grade municipal debt and corporate
debt and expressing concern with price transparency of debt
instruments, generally) and FD/CFA Letter (arguing that the
exception should not be further expanded or that it should be
eliminated altogether because of concerns regarding the price
transparency of debt instruments).
One commenter supporting a broadening of the exception also
urged us to modify our definition of ``investment grade debt
security'' to require that a qualifying security receive ratings
from only one nationally recognized statistical rating organization
(``NRSRO'') instead of two. SIFMA Letter I. We are considering more
globally, and in a separate rulemaking, whether our inclusion of
requirements related to credit ratings in our rules and forms as an
indication of investment grade quality has, in effect, placed an
``official seal of approval'' on ratings and has adversely affected
the quality of due diligence and investment analysis. See References
to Ratings of Nationally Recognized Statistical Rating Organizations
in Rules Under the Investment Company Act and Investment Advisers
Act, Investment Company Act Release No. 28327 (Jul. 1, 2008) [73 FR
40124 (July 11, 2008)]. In conjunction with recently reopening the
comment period for the proposal with respect to Rule 206(3)-3T, the
Commission requested comment on whether it should substitute an
approach that uses credit ratings as a minimum standard along with
additional criteria that must be met with regard to evaluating
securities. The re-opened comment period closed on December 8, 2009.
See References to Ratings of Nationally Recognized Statistical
Rating Organizations, Investment Company Act Release No. 28939 (Oct.
5, 2009) [74 FR 52358 (Oct. 9, 2009)].
\35\ See, e.g., SIFMA Letter I (arguing that the dual
registration condition preserves important investor protections that
were available to former fee-based brokerage customers who elected
after the FPA Decision to convert their accounts to advisory
accounts).
\36\ See, e.g., FPA Letter I (urging us to eliminate the
limitation because investors would already receive the protections
of both the Advisers Act and the Exchange Act whether the adviser is
itself also registered as a broker-dealer or whether it is simply
affiliated with a broker-dealer, and further arguing that that the
condition may have anticompetitive effects, providing an advantage
to investment advisers that are also registered as broker-dealers);
Comment Letter of the American Bar Association, section of Business
Law's Committee on Federal Regulation of Securities (Apr. 18, 2008)
(``ABA Committee Letter'') (arguing that the substantial regulatory
burdens of applying two regulatory regimes is not offset by
additional investor protection benefits).
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Several commenters agreed with our decision to limit the rule to
non-discretionary accounts.\37\ In contrast, one commenter urged us to
expand the rule to be available to all advisory accounts, not just non-
discretionary ones.\38\ One commenter urged us to limit the scope of
the rule so that advisers may only rely on it when they are conducting
a principal trade with a ``qualified client,'' as defined under Rule
205-3 [17 CFR 275.205-3] under the Advisers Act,\39\ while another
argued that the rule should not be restricted to particular
clients.\40\
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\37\ See, e.g., FD/CFA Letter (arguing that discretionary
accounts present a ``greater risk of abuse as a general matter'' and
expressed appreciation for the protections provided by this
limitation); IAA Letter; SIFMA Letter I (agreeing that the rule
should apply to all non-discretionary accounts, but specifically
noting that the rule should not be further limited in application to
former fee-based brokerage accounts only); FPA Letter I (supporting
the limitation as providing a critical investor protection, but
arguing that we should consider further narrowing the non-
discretionary account limitation to include only those accounts that
were formerly fee-based brokerage accounts).
\38\ ABA Committee Letter (arguing that the specific exclusion
in the rule for adviser-underwritten securities, together with an
adviser's best execution obligations, provides investors with
sufficient investor protections and therefore clients in
discretionary accounts should not be precluded from the benefits of
the relief provided by the rule).
\39\ FPA Letter I (further arguing that institutional clients or
natural persons who are deemed to be ``qualified clients'' for
purposes of Rule 205-3 are better positioned to understand the
nature of principal transactions and the potential conflicts and,
therefore, are better able to protect themselves against potential
abuses than are other investors). Another commenter also expressed
general objections to the placing of any principal trades by
investment advisers. NAPFA Letter.
\40\ SIFMA Letter I (noting that all investors should be able to
benefit from the greater investment choices, potentially enhanced
executions and additional liquidity provided by the rule).
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b. Comments on Sunset Provision
Five commenters addressed the duration of Rule 206(3)-3T.\41\ Three
expressed support for the temporary duration of the rule, arguing that,
in light of the substantial risks associated with principal trading
facilitated by the rule, a temporary effectiveness period would be
important for the Commission to assess whether the scope of relief
provided by the rule is appropriate.\42\ Two commenters supported
making the rule permanent at the end of the sunset provision with
broadened relief.\43\
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\41\ FPA Letter I; Comment Letter of the Financial Planning
Association (Sep. 16, 2008) (``FPA Letter II''); IAA Letter; SIFMA
Letter I; Comment Letter of the Securities Industry and Financial
Markets Association (Aug. 21, 2009) (``SIFMA Letter II''); DPW
Letter; NAPFA Letter.
\42\ FPA Letter I; IAA Letter; NAPFA Letter.
\43\ DPW Letter; SIFMA Letter I.
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We received two subsequent letters from market participants. The
Securities Industry and Financial Markets Association (SIFMA) urged us
to extend
[[Page 69012]]
the temporary rule for two years in light of pending legislation that
could address principal trading by investment advisers.\44\ The
Financial Planning Association (FPA) also wrote recommending allowing
the rule to expire or extending it for no more than an additional year
while the Commission conducts a study that either substantiates a clear
basis for adopting a permanent exemption under Section 206(3) or
disproves the view of firms that it affords unique benefits to the
public.\45\
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\44\ SIFMA Letter II.
\45\ FPA Letter II.
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c. Limited Extension of Temporary Rule
When we adopted Rule 206(3)-3(T) on a temporary basis in September
2007, we anticipated the two-year period would provide us with adequate
time to evaluate the operation of the rule in the marketplace and
determine, in conjunction with consideration of all comments received,
whether the rule should be made permanent, modified or allowed to
expire. At the time we adopted the interim final rule, we explained
that we would need to take action no later than the end of the original
duration of the temporary rule if we intended to continue the same or
similar relief.\46\
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\46\ See 2007 Principal Trade Rule Release, Section II.B.9.
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We need additional time to understand how, and in what situations,
advisers are using the rule. Fewer firms than we anticipated at the
time we adopted the rule on an interim final basis immediately
determined to rely on it and those that did were slower than expected
to implement the rule. We take seriously the investor protection
concerns raised by commenters. Consequently, we have determined to
limit the duration of the extension to one year while we continue to
evaluate the operation of the rule. As our staff continues to gather
information, we will assess whether the rule is operating, and firms
are applying it, in a manner consistent with protecting investors.
Given the limited nature of the extension, we believe that making
other changes to the temporary rule could cause firms relying on the
rule to need to make adjustments to their disclosure documents, client
agreements, procedures, or systems that, depending on whether we
determine to propose and adopt a permanent rule in the future, may be
applicable for only a year.
Further evaluation will help inform our decision whether to propose
to make the rule permanent in its current or an amended form or to
allow it to expire.\47\ We will consider, among other things, the
comments we received on the interim final rule in deciding whether to
propose a permanent rule or to let the rule expire. If we decide to
propose a permanent rule, we will also consider the comments we
received in determining how such a rule might differ from Rule 206(3)-
T.
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\47\ Subsequent to adopting Rule 206(3)-3T, the study prepared
by RAND Corporation was completed. See Investor and Industry
Perspectives on Investment Advisers and Broker-Dealers, https://www.sec.gov/news/press/2008/2008-1_randiabdreport.pdf. The study
addressed two primary questions: (1) What are the current business
practices of broker-dealers and investment advisers; and (2) do
investors understand the differences between and relationships among
broker-dealers and investment advisers? Several of the bills
currently pending before Congress are designed to harmonize the
separate regulatory regimes for investment advisers and broker-
dealers.
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In addition, there are currently pending before both houses of
Congress bills that may address, or otherwise have an impact on,
principal trading activities by investment advisers and broker-dealers,
as well as broader issues under the Advisers Act.\48\ Waiting some
additional time for Congress to act will permit us to consider the
impact that any of those proposals, if enacted, will have on such
activities prior to taking further action with respect to the temporary
rule.
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\48\ See, e.g., Investor Protection Act of 2009, H.R. 3817,
111th Cong. (2009); Restoring American Financial Stability Act of
2009, S. ---- 111th Cong. (2009).
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For the reasons discussed in this release, we have determined that
it is necessary or appropriate in the public interest and consistent
with the protection of investors and consistent with the purposes
fairly intended by the policy and provisions of the Advisers Act to
adopt Rule 206(3)-T as a final temporary rule. We are adopting Rule
206(3)-3T in the same form in which we originally adopted it on an
interim final basis, except that it will expire on December 31, 2010,
one year after its original expiration date.
III. Certain Administrative Law Matters
The amendment to Rule 206(3)-3T is effective on December 30, 2009.
The Administrative Procedure Act generally requires that an agency
publish a final rule in the Federal Register not less than 30 days
before its effective date.\49\ However, this requirement does not apply
if the rule is a substantive rule which grants or recognizes an
exemption or relieves a restriction, or if the rule is
interpretive.\50\ Rule 206(3)-3T in part has interpretive aspects and
is a rule that recognizes an exemption and relieves a restriction.
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\49\ 5 U.S.C. 553(d).
\50\ 5 U.S.C. 553(d)(1) and (2).
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IV. Paperwork Reduction Act
Rule 206(3)-3T contains ``collection of information'' requirements
within the meaning of the Paperwork Reduction Act of 1995.\51\ The
Office of Management and Budget (``OMB'') approved the burden estimates
presented in the 2007 Principal Trade Rule Release,\52\ first on an
emergency basis and subsequently on a regular basis. OMB approved the
collection of information with an expiration date of March 31, 2011. An
agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information unless it displays a currently
valid OMB control number. The title for the collection of information
is: ``Temporary rule for principal trades with certain advisory
clients, rule 206(3)-3T'' and the OMB control number for the collection
of information is 3235-0630.
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\51\ 44 U.S.C. 3501 et seq.
\52\ See 2007 Principal Trade Rule Release, Section V.B&C.
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The 2007 Principal Trade Rule Release explains that, under Rule
206(3)-3T, there are four distinct collection burdens. Our estimate of
the burden of each of the collections reflects the fact that the
alternative means of compliance provided by the rule is substantially
similar to the approach advisers currently employ to comply with the
disclosure and consent obligations of Section 206(3) of the Advisers
Act and the approach that broker-dealers employ to comply with the
confirmation requirements of Rule 10b-10 under the Exchange Act. The
2007 Principal Trade Rule Release solicited comments on our PRA
estimates,\53\ but we did not receive comment on them. The amendment to
the rule we are adopting today--to extend the rule for twelve months--
does not affect the burden estimates contained in the 2007 Principal
Trade Rule Release.\54\
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\53\ See id., Section V.D.
\54\ As discussed above, fewer firms than we anticipated at the
time we adopted the rule on an interim final basis immediately
determined to rely on it and those that did were slower than
expected in implementing it. We received no comments on our estimate
of the number of advisers or accounts and, for purposes of this
release, are retaining those estimates.
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V. Cost-Benefit Analysis
We are adopting, as a final temporary rule, Rule 206(3)-3T under
the Advisers Act, which provides an alternative means for investment
advisers that are registered with us as broker-dealers to meet the
requirements of Section 206(3)
[[Page 69013]]
when they act in a principal capacity with respect to transactions with
certain of their advisory clients. Other than extending the sunset
period of the temporary rule for one year, we are not otherwise
modifying the rule from the form in which we initially adopted it on an
interim final basis in September 2007.
In summary, as explained in the 2007 Principal Trade Rule
Release,\55\ we believe the principal benefit of Rule 206(3)-3T is that
it maintains investor choice and protects the interests of investors
who held an estimated $300 billion in one million fee-based brokerage
accounts. A resulting second benefit of the rule is that non-
discretionary advisory clients of advisory firms that are also
registered as broker-dealers have easier access to a wider range of
securities which, in turn, should lead to increased liquidity in the
markets for these securities and promote capital formation in these
areas. A third benefit of the rule is that it provides the protections
of the sales practice rules of the Exchange Act and the relevant self-
regulatory organizations because an adviser relying on the rule must
also be a registered broker-dealer. Another benefit of Rule 206(3)-3T
is that it provides a lower cost alternative for an adviser to engage
in principal transactions.
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\55\ For a complete discussion of the benefits for Rule 206(3)-
3T, see 2007 Principal Trade Rule Release, Section VI.
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We believe there are some benefits associated with extension of the
rule for one year. By extending the rule for one year, non-
discretionary advisory clients who have had access to certain
securities because of their advisers' reliance on the rule to trade on
a principal basis will continue to have access to those securities
without disruption. Firms relying on the rule will continue to be able
to offer clients and prospective clients access to certain securities
on a principal basis as well and will not need during this one-year
period to incur the cost of adjusting to a new set of rules or
abandoning the systems established to comply with the current rule. In
other words, extension will avoid disruption to clients and firms
during the period while we consider whether to make the rule permanent
in its current form or in a modified form or to let it expire.
As discussed in the 2007 Principal Trade Rule Release,\56\ we
presented estimates of the costs of each of the rule's disclosure
elements, including: the prospective disclosure and consent;
transaction-by transaction disclosure and consent; transaction-by-
transaction confirmations; and the annual report of principal
transactions. We also provided estimates for the following related
costs of compliance with Rule 206(3)-3T: (i) The initial distribution
of prospective disclosure and collection of consents; (ii) systems
programming costs to ensure that trade confirmations contain all of the
information required by the rule; and (iii) systems programming costs
to aggregate already-collected information to generate compliant
principal transactions reports.\57\ Finally, we solicited comment on,
and requested data to assist us in further developing, our cost and
benefit estimates.\58\
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\56\ See 2007 Principal Trade Rule Release, Section VI.D.
\57\ We note that the rule provides an alternative means of
compliance with Section 206(3) of the Advisers Act. Therefore, there
is no requirement that any adviser rely on it. We believe that it is
reasonable to assume that only those advisers that conclude that the
benefits in aggregate outweigh the aggregate costs of relying on the
rule would choose to do so.
\58\ See 2007 Principal Trade Rule Release, Section VI.
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We did not receive comments directly addressing with supporting
data the cost-benefit analysis we presented in the 2007 Principal Trade
Rule Release and we continue to believe that our estimates reflect the
likely costs an adviser would incur to rely on the rule.\59\ Several of
the comments described above, however, relating to the utility of
specific disclosure provisions, along with an additional comment
regarding the potential effect of the rule on small firms, do have
bearing on our cost-benefit analysis of the rule. In particular, one
commenter argued that the costs of transaction-by-transaction notice
and consent for sophisticated investors may outweigh the benefits.\60\
This commenter suggested that the rule expressly permit negative
consent for principal trading because the costs for certain clients who
must locate and contact an authorized person to sign an affirmative
consent on behalf of the client on a timely basis may outweigh the
benefits.\61\ Another commenter expressed doubt that the benefit of the
transaction-by-transaction confirmation requirement would outweigh the
costs of revising and further burdening the standard confirmation form,
especially given the rule's other disclosure and consent
requirements.\62\ Another commenter argued that limiting the
availability of the rule to advisers that also are registered as
broker-dealers imposes substantial regulatory burdens that are not
justified by corresponding investor protection benefits.\63\ We
recognize these commenters' concerns and will consider them, as well as
all the other comments we have received, if we determine to propose to
make the rule permanent in its current or a modified form. For purposes
of the limited extension at issue here, however, we believe the costs
of adjustments to practices and systems that may or may not be
continued or necessary under a potential, future permanent rule would
not be justified at this time.\64\
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\59\ As discussed above, fewer firms than we anticipated at the
time we adopted the rule on an interim final basis immediately
determined to rely on it. We received no comments on our estimate of
the number of advisers or accounts and, for purposes of this
release, are retaining our original estimates.
\60\ DPW Letter.
\61\ Id.
\62\ FD/CFA Letter.
\63\ ABA Committee Letter.
\64\ See Section II.C. of this Release.
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We acknowledge that firms relying on the rule would incur
operational costs associated with complying with the rule for one year.
We believe that the estimates of the costs we outlined were reasonable,
and no commenter provided specific, alternative estimates. We believe
that the benefits were appropriately identified. We believe that all
the costs and benefits associated with the rule--which, as noted above,
the purpose of which was to permit broker-dealers to sell to their non-
discretionary advisory clients 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) should be considered in aggregate. The particular
array of disclosure requirements and limitations contained in the rule
was tailored to safeguard investor protection and counterbalance
investor protection concerns that might stem from the rule's allowance
for transaction-by-transaction notice and consent to principal trades
to be delivered orally or in written form, instead of just in written
form. We believe that, for purposes of this one-year extension of the
rule, these overall benefits justify the costs associated with the
rule.
VI. Promotion of Efficiency, Competition, and Capital Formation
Section 202(c) of the Advisers Act mandates that the Commission,
when engaging in rulemaking that requires it to consider or determine
whether an action is necessary or appropriate in the public interest,
consider, in addition to the protection of investors, whether the
[[Page 69014]]
action will promote efficiency, competition, and capital formation.\65\
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\65\ 15 U.S.C. 80b-2(c).
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As we explained in the 2007 Principal Trade Rule Release, Rule
206(3)-3T may increase efficiency by providing an alternative means of
compliance with Section 206(3) of the Advisers Act that we believe will
be less costly and less burdensome.\66\ By permitting oral transaction-
by-transaction disclosure, advisers may be more willing to engage in
principal trades with advisory clients leading advisers to provide
access to certain securities the adviser or its affiliate has in
inventory. As we noted in the 2007 Principal Trade Rule Release, firms
have argued that making securities available to clients through
principal trades could lead to faster or less expensive execution,
advantages a client may deem to outweigh the risks presented by
principal trading with an adviser.\67\
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\66\ 2007 Principal Trade Rule Release, Section VII.
\67\ Id.
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We further explained our expectation that Rule 206(3)-3T will
promote competition because it preserves investor choice for different
types of advisory accounts and that, if Rule 206(3)-3T has any effect
on capital formation, it is likely to be positive, although
indirect.\68\ We also described our understanding that providing an
alternative to the traditional requirements of transaction-by-
transaction written disclosure might serve to broaden the potential
universe of purchasers of securities, in particular investment grade
debt securities, for the reasons described in the 2007 Principal Trade
Rule Release, opening the door to greater investor participation in the
securities markets with a potential positive effect on capital
formation.\69\
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\68\ Id.
\69\ Id., Section II.B.2.
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Some commenters, while expressing support for the goal of affording
investors engaged in principal transactions the protections of both the
investment adviser regulatory regime (i.e., the Advisers Act and rules
thereunder) and the broker-dealer regulatory regime (i.e., the Exchange
Act and rules thereunder and the rules of applicable SROs), opposed the
limitation of the temporary rule not only to investment advisers that
are also registered as broker-dealers, but also to accounts that are
subject to both the Advisers Act and Exchange Act.\70\ One of these
commenters specifically argued that these limitations are unnecessary,
contending they provide no additional protection for investors engaging
in principal transactions because any principal trades conducted for an
advisory account would be subject to the Exchange Act and SRO rules
anyway.\71\ This commenter concluded that the limitation instead merely
provides a competitive advantage to investment advisers that are also
registered broker-dealers.\72\
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\70\ See, e.g., FPA Letter I; ABA Committee Letter; SIFMA Letter
I. Another commenter commented upon potential anti-competitive
aspects of the rule, in particular as it relates to a proposed (but
not adopted) interpretive rule that was proposed on the same day
Rule 206(3)-3T was adopted on an interim final basis. IASBDA Letter.
See also note 19 above. Because those comments relate more directly
to the proposed interpretive rule, they will be considered in
conjunction with that interpretive rulemaking.
\71\ FPA Letter I (arguing that a client engaging in a principal
trade enjoys the benefits of two regulatory regimes regardless of
whether the client's adviser is itself both an investment adviser
and a broker-dealer for purposes of the Federal securities laws or
instead affiliated with a separate broker-dealer with which the
client engages in the trade on a principal basis because, in the
first instance, a single firm is responsible for meeting all
regulatory requirements (including those of the Commission and the
relevant SRO) and in the second, one firm holds the broad fiduciary
duties of an adviser (and is subject to Commission oversight), while
the affiliated broker-dealer must still comply with the Commission's
and relevant SRO's sales practice and best execution requirements).
\72\ Id.
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We intend to continue to evaluate the effects of the rule on
efficiency, competition and capital formation as we consider whether to
propose to extend or modify the rule or allow it to expire. As
discussed above, we have no reason to believe, based on our experience
with the rule to date, that small broker-dealers (or affiliated but
separate investment advisers and broker-dealers) are put at a
competitive disadvantage to larger advisers that are themselves also
registered as broker-dealers. We believe that the effects on
efficiency, competition and capital formation of Rule 206(3)-3T as it
was adopted on an interim final basis warrant its continued operation
for the additional limited period of time. We anticipate no new effects
on efficiency, competition and capital formation as a result of the
one-year extension. During that time, we will continue to assess the
rule's operation and impact along with intervening developments.
VII. Final Regulatory Flexibility Act Analysis
A final regulatory flexibility analysis (``FRFA'') was prepared in
accordance with 5 U.S.C. 603 when Rule 206(3)-3T was adopted in
September 2007. In the 2007 Principal Trade Rule Release, we analyzed:
(i) The need for and objectives of the rule; (ii) an estimate of small
entities subject to the rule; (iii) the rule's projected reporting,
recordkeeping and other compliance requirements; (iv) agency action to
minimize the effect on small entities; (v) duplicative, overlapping or
conflicting Federal rules; and (vi) significant alternatives. We sought
comment on each of these aspects of our FRFA.
As discussed above, several commenters objected to the condition
that advisers seeking to rely on the rule must also be registered as
broker-dealers and that each account must be subject to both the
Advisers Act and the Exchange Act (and applicable SRO rules). Some
contended that the burdens of requiring application of both regulatory
regimes do not outweigh the benefits.\73\ Others essentially argued
that limiting the availability of the relief under the rule to advisers
also registered as broker-dealers might be anti-competitive.\74\ With
respect to small entities in particular, one commenter suggested that
the alternative means of compliance with the Advisers Act's principal
trading restrictions made available by Rule 206(3)-3T (in particular,
when considered in conjunction with the interpretive rule proposed on
the same day),\75\ would disadvantage small broker-dealers because they
are less likely to also be registered as an investment adviser, and as
a result would have to form an adviser to take advantage of the
benefits of the rule.\76\
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\73\ See notes 35-36 and accompanying text above
\74\ See notes 70-72 and accompanying text above.
\75\ See note 19 above.
\76\ IASBDA Letter.
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We specifically considered and discussed these issues in the final
regulatory flexibility analysis in the 2007 Principal Trade Rule
Release and believe that it is appropriate to continue this condition
of the rule for the limited extension. As explained above, however, we
expect to continue to consider these comments in conjunction with data
our staff gathers on the operation of the rule in the marketplace, no
later than the end of the rule's revised termination date if the
Commission intends to propose to continue the same or similar relief.
VIII. Statutory Authority
The Commission is adopting Rule 206(3)-3T pursuant to Sections 206A
and 211(a) of the Advisers Act.
Text of Rule
List of Subjects in 17 CFR Part 275
Investment advisers, Reporting and recordkeeping requirements.
0
For the reasons set out in the preamble, Title 17, Chapter II of the
[[Page 69015]]
Code of Federal Regulations is amended as follows:
PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940
0
1. The general authority citation for Part 275 continues to read as
follows:
Authority: 15 U.S.C. 80b-2(a)(11)(G), 80b-2(a)(17), 80b-3, 80b-
4, 80b-4a, 80b-6(4), 80b-6a, and 80b-11, unless otherwise noted.
* * * * *
0
2. Section 275.206(3)-3T(d) is revised to read as follows:
Sec. 275.206(3)-3T Temporary rule for principal trades with certain
advisory clients.
(d) This section will expire and no longer be effective on December
31, 2010.
Dated: December 23, 2009.
By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. E9-30877 Filed 12-29-09; 8:45 am]
BILLING CODE 8011-01-P
