Temporary Rule Regarding Principal Trades With Certain Advisory Clients, 48709-48716 [2014-19421]

Download as PDF Federal Register / Vol. 79, No. 159 / Monday, August 18, 2014 / Proposed Rules washers, P/N EN2139–05016, to connect the SEMA with the control rod. Torque-tighten each screw to 5–6 Nm and apply polyurethane lacquer onto the attachment hardware. (f) Alternative Methods of Compliance (AMOCs) (1) The Manager, Safety Management Group, FAA, may approve AMOCs for this AD. Send your proposal to: Matt Wilbanks, Aviation Safety Engineer, Regulations and Policy Group, Rotorcraft Directorate, FAA, 2601 Meacham Blvd., Fort Worth, Texas 76137; telephone (817) 222–5110; email matt.wilbanks@faa.gov. (2) For operations conducted under a 14 CFR part 119 operating certificate or under 14 CFR part 91, subpart K, we suggest that you notify your principal inspector, or lacking a principal inspector, the manager of the local flight standards district office or certificate holding district office before operating any aircraft complying with this AD through an AMOC. (g) Additional Information The subject of this AD is addressed in the European Aviation Safety Agency (EASA) AD No. 2013–0176, dated August 7, 2013. You may view the EASA AD on the Internet at http://www.regulations.gov in Docket No. FAA–2014–0577. (i) Subject Joint Aircraft Service Component (JASC) Code: 2213, Flight Controller. Issued in Fort Worth, Texas, on August 8, 2014. Lance T. Gant, Acting Directorate Manager, Rotorcraft Directorate, Aircraft Certification Service. [FR Doc. 2014–19524 Filed 8–15–14; 8:45 am] BILLING CODE 4910–13–P SECURITIES AND EXCHANGE COMMISSION 17 CFR Part 275 [Release No. IA–3893; File No. S7–23–07] RIN 3235–AL56 Securities and Exchange Commission. ACTION: Proposed rule. AGENCY: The Securities and Exchange Commission is proposing to amend rule 206(3)–3T under the Investment Advisers Act of 1940, a temporary rule that establishes an alternative means for investment advisers that 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. The amendment would tkelley on DSK3SPTVN1PROD with PROPOSALS SUMMARY: 16:52 Aug 15, 2014 Comments must be received on or before September 17, 2014. DATES: Comments may be submitted by any of the following methods: ADDRESSES: Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/proposed.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number S7– 23–07 on the subject line; or • Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments. Paper Comments • Send paper comments to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number S7–23–07. This file number should be included on the subject line if email is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (http://www.sec.gov/rules/ proposed.shtml). Comments are also available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change; we do not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. FOR FURTHER INFORMATION CONTACT: Temporary Rule Regarding Principal Trades With Certain Advisory Clients VerDate Mar<15>2010 extend the date on which rule 206(3)– 3T will sunset from December 31, 2014 to December 31, 2016. Jkt 232001 Melissa S. Gainor, Senior Counsel, Sarah A. Buescher, Branch Chief, or Daniel S. Kahl, Assistant Director, at (202) 551–6787 or IArules@sec.gov, Investment Adviser Regulation Office, Division of Investment Management, U.S. Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–8549. The Securities and Exchange Commission is proposing an amendment to temporary rule 206(3)–3T [17 CFR 275.206(3)–3T] under the Investment Advisers Act of 1940 [15 U.S.C. 80b] that would extend the date on which the rule will sunset from December 31, 2014 to December 31, 2016. SUPPLEMENTARY INFORMATION: PO 00000 Frm 00017 Fmt 4702 Sfmt 4702 48709 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 that 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 As initially adopted on an interim final basis, rule 206(3)–3T was set to sunset on December 31, 2009. In December 2009, however, we adopted rule 206(3)–3T as a final rule in the same form in which it was adopted on an interim final basis in 2007, except that we extended the rule’s sunset date by one year to December 31, 2010.5 We 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 DC 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 feebased 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, brokerdealers offering fee-based brokerage accounts with an advisory component 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. 5 See Temporary Rule Regarding Principal Trades with Certain Advisory Clients, Investment Advisers Act Release No. 2965 (Dec. 23, 2009) [74 FR 69009 E:\FR\FM\18AUP1.SGM Continued 18AUP1 48710 Federal Register / Vol. 79, No. 159 / Monday, August 18, 2014 / Proposed Rules tkelley on DSK3SPTVN1PROD with PROPOSALS deferred final action on rule 206(3)–3T in December 2009 because we needed additional time to understand how, and in what situations, the rule was being used.6 In both December 2010 and December 2012, we further extended the rule’s sunset date, in each case for an additional two-year period.7 We deferred final action on rule 206(3)–3T in 2010 in order to complete a study required by section 913 of the DoddFrank Wall Street Reform and Consumer Protection Act (the ‘‘Dodd-Frank Act’’).8 In 2012, we deferred final action on rule 206(3)–3T to further consider the findings, conclusions, and recommendations of the 913 Study and the comments we had received from (Dec. 30, 2009)] (‘‘2009 Extension Release’’); Temporary Rule Regarding Principal Trades with Certain Advisory Clients, Investment Advisers Act Release No. 2965A (Dec. 31, 2009) [75 FR 742 (Jan. 6, 2010)] (making a technical correction to the 2009 Extension Release). 6 See 2009 Extension Release, Section II.c. 7 See Temporary Rule Regarding Principal Trades with Certain Advisory Clients, Investment Advisers Act Release No. 3118 (Dec. 1, 2010) [75 FR 75650 (Dec. 6, 2010)] (proposing a two-year extension of rule 206(3)–3T’s sunset provision) (‘‘2010 Extension Proposing Release’’); Temporary Rule Regarding Principal Trades with Certain Advisory Clients, Investment Advisers Act Release No. 3128 (Dec. 28, 2010) [75 FR 82236 (Dec. 30, 2010)] (extending rule 206(3)–3T’s sunset provision from December 31, 2010 to December 31, 2012) (‘‘2010 Extension Release’’); Temporary Rule Regarding Principal Trades with Certain Advisory Clients, Investment Advisers Act Release No. 3483 (Oct. 9, 2012) [77 FR 62185 (Oct. 12, 2012)] (proposing a two-year extension of rule 206(3)–3T’s sunset provision); Temporary Rule Regarding Principal Trades with Certain Advisory Clients, Investment Advisers Act Release No. 3522 (Dec. 20, 2012) [77 FR 76854 (Dec. 31, 2012)] (extending rule 206(3)–3T’s sunset provision from December 31, 2012 to December 31, 2014) (‘‘2012 Extension Release’’). 8 Public Law 111–203, 124 Stat. 1376 (2010). Under section 913 of the Dodd-Frank Act, we were required to conduct a study and provide a report to Congress concerning the obligations of brokerdealers and investment advisers, including standards of care applicable to those intermediaries and their associated persons. Section 913 also authorizes us to promulgate rules concerning the legal or regulatory standards of care for brokerdealers, investment advisers, and persons associated with these intermediaries for providing personalized investment advice about securities to retail customers, taking into account the findings, conclusions, and recommendations of the study. The study mandated by section 913 of the DoddFrank Act was prepared by the staff and delivered to Congress on January 21, 2011. See Study on Investment Advisers and Broker-Dealers (‘‘913 Study’’) (Jan. 21, 2011), available at http:// www.sec.gov/news/studies/2011/913studyfinal.pdf. For a discussion regarding principal trading, see section IV.C.1.(b) of the 913 Study. See also Commissioners Kathleen L. Casey and Troy A. Paredes, Statement by SEC Commissioners: Statement Regarding Study on Investment Advisers and Broker-Dealers (Jan. 21, 2011), available at http://www.sec.gov/news/speech/2011/ spch012211klctap.htm (opposing the release of the 913 Study to Congress and stating that more rigorous analysis is required before the Commission engages in any follow-on rulemaking). VerDate Mar<15>2010 16:52 Aug 15, 2014 Jkt 232001 interested parties.9 In connection with each extension, we noted that our consideration of the regulatory requirements applicable to brokerdealers and investment advisers was ongoing and that an extension would allow the Commission to consider more broadly the regulatory requirements applicable to broker-dealers and investment advisers, including whether rule 206(3)–3T should be substantively modified, supplanted, or permitted to sunset.10 We have continued to consider the regulatory requirements applicable to broker-dealers and investment advisers. In 2013, we issued a request for data and other information, including quantitative data and economic analysis, relating to the benefits and costs that could result from alternative approaches regarding the standards of conduct and other obligations of brokerdealers and investment advisers.11 The staff has received over 200 comment letters in response to the Request, several of which discussed rule 206(3)– 3T, and Commissioners and the staff have held numerous meetings with interested parties.12 None of the comment letters provided quantitative or qualitative information regarding the effects of the temporary rule. II. Discussion We are proposing to amend rule 206(3)–3T to extend the rule’s sunset date by two additional years.13 Absent 9 See 2012 Extension Release, Section II. id.; 2010 Extension Release, Section II. 11 Duties of Brokers, Dealers, and Investment Advisers, Investment Advisers Act Release No. 3558 (Mar. 1, 2013) [78 FR 14848 (Mar. 7, 2013)] (the ‘‘Request’’). 12 See Comments on Study Regarding Obligations of Brokers, Dealers, and Investment Advisers, File No. 4–606, available at http://sec.gov/comments/4606/4-606.shtml. See e.g., Comment Letter of Consumer Federation of America (Jul. 5, 2013) (‘‘[B]y considering revisions to the principal trading rules as part of the fiduciary rulemaking, the Commission could arrive at a workable approach that is consistent for brokers and investment advisers and provides improved protections for investors.’’); Comment Letter of North American Securities Administrators Association, Inc. (Jul. 5, 2013) (‘‘[T]he Commission should consider SEC Rule 206(3)–3T as part of future fiduciary standard rulemaking.’’); Comment Letter of Securities Industry and Financial Markets Association (‘‘SIFMA’’) (Jul. 5, 2013) (‘‘SIFMA 2013 Letter’’) (including survey results regarding the dollar amount of principal transactions engaged in with retail clients during 2012). 13 The rule includes a reference to an ‘‘investment grade debt security,’’ which is defined as ‘‘a nonconvertible debt security that, at the time of sale, is rated in one of the four highest rating categories of at least two nationally recognized statistical rating organizations (as defined in section 3(a)(62) of the Exchange Act).’’ Rule 206(3)–3T(a)(2) and (c). Section 939A of the Dodd-Frank Act requires that we ‘‘review any regulation issued by [us] that requires the use of an assessment of the credit10 See PO 00000 Frm 00018 Fmt 4702 Sfmt 4702 further action by the Commission, the rule will sunset on December 31, 2014. We are proposing this extension because we continue to believe that the issues raised by principal trading, including the restrictions in section 206(3) of the Advisers Act and our experiences with, and observations regarding, the operation of rule 206(3)–3T, should be considered as part of our broader consideration of the regulatory requirements applicable to brokerdealers and investment advisers in connection with the Dodd-Frank Act.14 As noted above, section 913 of the Dodd-Frank Act authorizes us to promulgate rules concerning, among other things, the legal or regulatory standards of conduct for broker-dealers, investment advisers, and persons associated with these intermediaries when providing personalized investment advice about securities to worthiness of a security or money market instrument; and any references to or requirements in such regulations regarding credit ratings.’’ Once we have completed that review, the statute provides that we modify any regulations identified in our review to ‘‘remove any reference to or requirement of reliance on credit ratings and to substitute in such regulations such standard of creditworthiness’’ as we determine to be appropriate. We believe that the credit rating requirement in the temporary rule would be better addressed after the Commission completes its review of the regulatory standards of conduct that apply to broker-dealers and investment advisers. Therefore, we are not proposing any substantive amendments to the rule at this time. See generally Report on Review of Reliance on Credit Ratings (July 21, 2011), available at http://www.sec.gov/news/studies/2011/ 939astudy.pdf (staff study reviewing the use of credit ratings in Commission regulations). 14 The 913 Study is one of several studies relevant to the regulation of broker-dealers and investment advisers mandated by the Dodd-Frank Act. See, e.g., Study on Enhancing Investment Adviser Examinations (Jan. 19, 2011), available at http:// sec.gov/news/studies/2011/914studyfinal.pdf (staff study required by section 914 of the Dodd-Frank Act, which directed the Commission to review and analyze the need for enhanced examination and enforcement resources for investment advisers); Commissioner Elisse B. Walter, Statement on Study Enhancing Investment Adviser Examinations (Required by Section 914 of Title IV of the DoddFrank Wall Street Reform and Consumer Protection Act) (Jan. 19, 2011), available at http://sec.gov/ news/speech/2011/spch011911ebw.pdf. See also Study and Recommendations on Improved Investor Access to Registration Information About Investment Advisers and Broker-Dealers (Jan. 26, 2011), available at http://sec.gov/news/studies/ 2011/919bstudy.pdf (staff study required by section 919B of the Dodd-Frank Act, that directed the Commission to complete a study, including recommendations (some of which have been implemented) of ways to improve investor access to registration information about investment advisers and broker dealers, and their associated persons); United States Government Accountability Office Report to Congressional Committees on Private Fund Advisers (July 11, 2011), available at http:// www.gao.gov/new.items/d11623.pdf (study required by section 416 of the Dodd-Frank Act, which directed the Comptroller General of the United States to study the feasibility of forming an selfregulatory organization to oversee private funds). E:\FR\FM\18AUP1.SGM 18AUP1 Federal Register / Vol. 79, No. 159 / Monday, August 18, 2014 / Proposed Rules tkelley on DSK3SPTVN1PROD with PROPOSALS retail customers. Since the completion of the 913 Study in 2011, we have been considering the findings, conclusions, and recommendations of the study and the comments we have received from interested parties.15 The Commission and its staff have continued to focus on evaluating options regarding regulatory requirements applicable to brokerdealers and investment advisers, taking into account the 913 Study’s recommendations, the views of investors and other interested market participants, potential economic and market impacts, and the information we received in response to the Request in 2013. Staff has also been engaged in examinations of dual registrants and is assessing the impact to investors of the different supervisory structures and legal standards of conduct that govern the provision of brokerage and investment advisory services, which may help inform our considerations.16 At this time, our consideration of the regulatory requirements applicable to broker-dealers and investment advisers is ongoing. We do not expect to complete our consideration of these issues before December 31, 2014, the current sunset date for rule 206(3)–3T. If we permit rule 206(3)–3T to sunset on December 31, 2014, after that date investment advisers registered with us as broker-dealers that currently rely on rule 206(3)–3T would be required to comply with section 206(3)’s transaction-by-transaction written disclosure and consent requirements without the benefit of the alternative means of complying with these requirements currently provided by rule 206(3)–3T. This could limit the access of non-discretionary advisory clients of advisory firms that are registered with us as broker-dealers to certain securities.17 In addition, firms may be required to make substantial changes to their disclosure documents, client agreements, procedures, and systems. We believe that the requirements of rule 206(3)–3T, coupled with regulatory oversight, will adequately protect advisory clients for an additional limited period of time while we consider more broadly the regulatory requirements applicable to broker15 Section 913(f) of the Dodd-Frank Act requires us to consider the 913 Study in any rulemaking authorized by that section of the Dodd-Frank Act. 16 See National Exam Program, Office of Compliance Inspections and Examinations, Examination Priorities for 2014 (Jan. 9, 2014), available at http://www.sec.gov/about/offices/ocie/ national-examination-program-priorities-2014.pdf. 17 For a discussion of the costs and benefits underlying rule 206(3)–3T, see 2007 Principal Trade Rule Release, Section VI.C. VerDate Mar<15>2010 16:52 Aug 15, 2014 Jkt 232001 dealers and investment advisers.18 Since its adoption and throughout the period of the proposed extension, the staff has examined and would continue to examine firms that engage in principal transactions and will take appropriate action to help ensure that firms are complying with section 206(3) or rule 206(3)–3T (as applicable), including possible enforcement action.19 Since the last extension, examination staff also requested and received materials from a sample of dual registrants in 2014 to observe the use of the rule by these firms.20 This examination showed that a number of the firms that were contacted by staff relied on the rule and that those firms had adopted written policies and procedures under rule 206(4)–7 that are designed to comply with the requirements of the temporary rule.21 Based on the review, it appeared to the staff that the firms relying on the rule had processes in place for the purpose of effecting principal transactions in compliance with the requirements of the temporary rule. In light of these considerations, we believe that it is not appropriate to require firms currently relying on the rule to restructure their operations and client relationships before we complete our consideration of the standards of conduct and regulatory requirements applicable to broker-dealers and investment advisers. To the extent our consideration of these issues leads to 18 In addition, rule 206(3)–3T(b) provides that the rule does not relieve an investment adviser from acting in the best interests of its clients, or from any obligation that may be imposed by sections 206(1) or (2) of the Advisers Act or any other applicable provisions of the federal securities laws. 19 In the 2010 Extension Proposing Release, we discussed certain compliance issues identified by the Office of Compliance, Inspections and Examinations. See 2010 Extension Proposing Release, Section II. One matter identified in the staff’s review resulted in a settlement of an enforcement proceeding and other matters continue to be reviewed by the staff. See In the Matter of Feltl & Company, Inc., Investment Advisers Act Release No. 3325 (Nov. 28, 2011) (settled order finding, among other things, violations of section 206(3) of the Advisers Act for certain principal transactions and section 206(4) of the Advisers Act and rule 206(4)–7 thereunder for failure to adopt written policies and procedures reasonably designed to prevent violations of the Advisers Act and its rules). 20 Staff identified a representative sample set of dual registrants based on Form ADV data, including firm disclosures on Form ADV Part 2A, and requested materials from the firms that included compliance policies and procedures, sample disclosures, and data regarding the firm’s principal transactions with advisory accounts. See also infra note 27. 21 17 CFR 275.206(4)–7. See also 2007 Principal Trade Rule Release (noting that an adviser relying on rule 206(3)–3T as an alternative means of complying with section 206(3) must have adopted and implemented written policies and procedures reasonably designed to comply with the requirements of the rule). PO 00000 Frm 00019 Fmt 4702 Sfmt 4702 48711 new rules concerning principal trading, these firms would be required to restructure their operations and client relationships, potentially at substantial expense. As part of our broader consideration of the regulatory requirements applicable to broker-dealers and investment advisers, we intend to carefully consider principal trading by advisers, including whether rule 206(3)– 3T should be substantively modified, supplanted, or permitted to sunset. In making these determinations, we will consider, among other things: The 913 Study; relevant comments and information received in connection with the 913 Study, the Request, and any rulemaking that may follow; the results of our staff’s evaluation of the operation of rule 206(3)–3T; the information received in connection with the review of dual registrants; and comments we receive on rule 206(3)–3T in connection with this proposed extension. III. Request for Comment We request comment on our proposal to extend rule 206(3)–3T’s sunset date for two additional years. • Should we allow the rule to sunset? • If so, what costs would advisers that currently rely on the rule incur? What would be the impact on their clients? • If we allow the rule to sunset, should we consider exemptive requests from investment advisers that are registered with us as broker-dealers for exemptive orders providing an alternative means of compliance with section 206(3)? • Are there any developments since the last extension that would make an extension not appropriate? • If we extend the rule’s sunset date, is two years an appropriate period of time to extend the sunset date? Or should we extend the rule’s sunset date for a different period of time? If so, for how long? • Is it appropriate to extend rule 206(3)–3T’s sunset date for a limited period of time in its current form while we complete our broader consideration of the regulatory requirements applicable to broker-dealers and investment advisers? IV. Paperwork Reduction Act Rule 206(3)–3T contains ‘‘collection of information’’ requirements within the meaning of the Paperwork Reduction Act of 1995.22 The Office of Management and Budget (‘‘OMB’’) last approved the collection of information with an expiration date of July 31, 2017. An agency may not conduct or sponsor, 22 44 E:\FR\FM\18AUP1.SGM U.S.C. 3501 et seq. 18AUP1 48712 Federal Register / Vol. 79, No. 159 / Monday, August 18, 2014 / Proposed Rules The Commission is sensitive to the economic effects, including the benefits and costs and the effects on efficiency, competition, and capital formation, that would result from extending rule 206(3)–3T’s sunset date for two years.24 The economic effects considered in proposing this extension are discussed below. Rule 206(3)–3T provides an alternative means for investment advisers that are registered with the Commission 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 their non-discretionary advisory clients. Other than proposing to extend rule 206(3)–3T’s sunset date for two years, we are not otherwise proposing to modify the rule from its current form. We are proposing to extend rule 206(3)– 3T in its current form to avoid disruption to firms and clients that rely on the rule while the Commission continues its ongoing consideration of the regulatory requirements applicable to broker-dealers and investment advisers and the recommendations from the 913 Study. In particular, an extension of the current rule would permit firms to continue to offer, and clients to have access to, certain securities on a principal basis without being required to restructure their operations and client relationships, adjust to a new set of rules, or abandon the operational systems established to comply with the current rule— potentially only to have to do so again when the rule expires or is modified, and once more if the Commission adopts a new approach to principal trading in connection with the broader consideration of the regulatory requirements applicable to brokerdealers and investment advisers. We previously considered and discussed the economic effects of rule 206(3)–3T in its current form in the 2007 Principal Trade Rule Release, the 2009 Extension Release, the 2010 Extension Release, and the 2012 Extension Release.25 At the outset, the Commission notes that, where possible, it has sought to quantify the costs, benefits, and effects on efficiency, competition, and capital formation expected to result from extending rule 206(3)–3T and its reasonable alternatives. In many cases, however, the Commission is unable to quantify the economic effects because it lacks the information necessary to provide a reasonable estimate.26 The staff has also not found other information, including through examinations and comment letters, which impacts the discussion of economic effects in previous releases. We will continue to assess the rule’s operation and impacts along with intervening developments during the period of the proposed extension. The temporary rule currently in effect serves as the economic baseline against which the costs and benefits, as well as 23 See Proposed Collection; Comment Request, 78 FR 72932 (Dec. 4, 2013); Submission for OMB Review; Comment Request, 79 FR 7481 (Feb. 7, 2014). 24 15 U.S.C. 80b–2(c). 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 action will promote efficiency, competition, and capital formation. 25 See 2007 Principal Trade Rule Release, Sections VI–VII; 2009 Extension Release, Sections V–VI; 2010 Extension Release, Sections V–VI; 2012 Extension Release, Sections V–VI. 26 In previous releases, the Commission has requested comment on the economic effects of rule 206(3)–3T, the economic effects of extending the rule, and the economic effects of alternatives. The Commission has not received comments providing quantitative data regarding the economic effects of extensions of rule 206(3)–3T, or to alternatives of the rule. 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 amendment to the rule we are proposing today—to extend rule 206(3)– 3T’s sunset date for two years—does not affect the current annual aggregate estimated hour burden of 139,358 hours.23 Therefore, we are not revising the Paperwork Reduction Act burden and cost estimates submitted to OMB as a result of this proposed amendment. We request comment on whether the estimates continue to be reasonable. Have circumstances changed such that these estimates (or the underlying assumptions embedded in these estimates) should be modified or revised? Persons submitting comments should direct the comments to the Office of Management and Budget, Attention: Desk Officer for the Securities and Exchange Commission, Office of Information and Regulatory Affairs, Washington, DC 20503, and should send a copy to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090, with reference to File No. S7–23–07. V. Economic Analysis tkelley on DSK3SPTVN1PROD with PROPOSALS A. Introduction VerDate Mar<15>2010 16:52 Aug 15, 2014 Jkt 232001 PO 00000 Frm 00020 Fmt 4702 Sfmt 4702 the impact on efficiency, competition, and capital formation, of the amendment are discussed. The proposed amendment, which will extend rule 206(3)–3T’s sunset date by an additional two years, will affect investment advisers that are registered with the Commission as broker-dealers and engage in, or may consider engaging in, principal transactions with nondiscretionary advisory clients, as well as the non-discretionary advisory clients of these firms that engage in, or may consider engaging in, principal transactions. Although the extent to which firms currently rely on the rule is unknown, based on IARD data as of June 1, 2014, there are 97 dual registrants that may rely on the rule.27 Past comment letters also have indicated that since its implementation in 2007, both large and small advisers have relied upon the rule.28 Additionally, one comment letter to the Request in 2013 provided survey results regarding the dollar amount of principal transactions that a small number of firms engaged in with retail clients in 2012.29 Because the economic effects of extending the rule and its reasonable alternatives will depend on the extent to which eligible firms rely on the rule to engage in principal transactions with non-discretionary 27 Based on IARD data as of June 2, 2014, there are 290 SEC-registered advisers that are also registered as broker-dealers that have nondiscretionary accounts who could potentially rely on the rule; however, only 97 of these dual registrants indicate they currently engage in principal transactions on Form ADV. The actual number of advisers that engage in principal transactions in reliance on the temporary rule is likely smaller. The staff’s recent outreach to observe the use of the rule by firms found that some of the dual registrants in the sample, which was derived based on Form ADV data, did not rely on the rule. 28 For example, SIFMA’s 2012 comment letter included survey results from seven dual-registrant firms that, in the aggregate, manage over $325 billion of assets in over 1.1 million nondiscretionary advisory accounts. The firms indicated that 459,507 non-discretionary advisory accounts (with aggregate assets of over $125 billion) were eligible to engage in principal trading in reliance on the rule. These firms also indicated that, during 2010–2012, the firms engaged in principal trades in reliance on Rule 206(3)–3T with respect to 106,682 accounts and executed an average of 12,009 principal trades per month in reliance on the rule. Comment letter of SIFMA (Nov. 13, 2012). See also Comment Letter of Wells Fargo Advisors (Nov. 13, 2012) (noting that the firm managed 232,437 non-discretionary advisory accounts in which hundreds of principal trades are made on a monthly basis for the benefit of investors). 29 See SIFMA 2013 Letter, supra note 12. Ten firms responded to SIFMA’s survey and reported that they relied on the temporary rule for $8 billion in principal transactions across 163,000 retail nondiscretionary advisory accounts. In comparison, the ten firms engaged in $36 billion in principal transaction with 498,000 retail advisory accounts under section 206(3) of the Advisers Act and $809 billion in principal transactions with 2,480,000 retail brokerage accounts. E:\FR\FM\18AUP1.SGM 18AUP1 Federal Register / Vol. 79, No. 159 / Monday, August 18, 2014 / Proposed Rules advisory clients, the economic effects could vary significantly among firms and their clients. tkelley on DSK3SPTVN1PROD with PROPOSALS B. Analysis of the Proposed Extension and Alternatives As noted above, the temporary rule currently in effect serves as the economic baseline against which the costs and benefits, as well as the impact on efficiency, competition, and capital formation, of the amendment are discussed. Because the extension of the sunset date in the temporary rule maintains the status quo, we do not expect additional costs or benefits to result from the extension. For the same reason, we also do not expect the extension to have additional effects on efficiency, competition or capital formation. Extending the current rule would provide the Commission with additional time to consider principal trading as part of the broader consideration of the regulatory requirements applicable to brokerdealers and investment advisers. Two reasonable alternatives to extending the current rule include allowing the rule to expire and adopting the rule on a permanent basis. If the rule is allowed to expire, then an adviser that is registered as a broker-dealer would no longer have a lower cost and more efficient alternative to the requirements under section 206(3) of the Advisers Act like that provided by the temporary rule,30 and consequently non-discretionary advisory account clients could lose access to the principal accounts of firms that rely on the rule. As noted in the 2012 Extension Release, greater access to a wider range of securities may allow non-discretionary advisory clients to more efficiently allocate capital and, in the long term, the more efficient allocation of capital may lead to an increase in capital formation.31 If the rule expires, the loss of access by non-discretionary advisory 30 Section 206(3) of the Advisers Act requires an investment adviser to provide written conflict-ofinterest disclosure describing its role as principal when transacting securities from its own account and obtain client consent prior to transaction completion. Rule 206(3)–3T provides a dual registrant firm the option of providing transactionby-transaction disclosures verbally instead of in writing when engaging in principal transactions with non-discretionary advisory clients as long as the firm satisfies additional requirements before and after the transactions. Additional requirements of the temporary rule include the provision of a written prospective disclosure to clients describing the conflicts arising from principal transactions, acquisition of written revocable client consent prospectively authorizing such transactions, the provision of transaction-by-transaction confirmations, and the provision of annual reports itemizing the clients’ principal transactions thereafter. 31 2012 Extension Release, Section V.B. VerDate Mar<15>2010 16:52 Aug 15, 2014 Jkt 232001 clients to a wider range of securities would reduce the ability of these investors to efficiently allocate capital and therefore could reduce any resulting long-term gains to capital formation. Allowing the rule to expire also would reduce the ability of investors to choose between brokerage accounts and advisory accounts if the investor wishes to maintain access to securities held in firm principal accounts, and may force non-discretionary advisory account clients to bear the costs associated with transferring accounts (or lose access to a firm’s principal accounts). Firms may also bear the potentially substantial costs associated with restructuring their operations and client relationships. On the other hand, if the rule is allowed to expire, and firms engage in principal transactions with advisory account clients pursuant to the requirements of section 206(3) of the Act, investors will be able to more fully evaluate the conflicts of the principal transactions prior to the trades. We continue to believe that nondiscretionary advisory client access to a wider range of securities is beneficial.32 Many clients wish to access securities held in firm inventory of a diversified broker-dealer, and clients may wish to access these securities through their non-discretionary advisory accounts.33 We believe that it is appropriate to preserve investors’ access to the securities available through principal transactions made in reliance on rule 206(3)–3T while consideration of the regulatory requirements applicable to broker-dealers and investment advisers is ongoing. In connection with the 2010 extension of the rule, a commenter argued that rule 206(3)–3T would impede, rather than promote, capital formation because it would lead to ‘‘more numerous and more severe violations . . . of the trust placed by individual investors in their trusted investment adviser’’, but did not provide any specific data, analysis, or other information in support of its 32 But see Comment Letter of fi360, Inc. (Nov. 13, 2012) (‘‘fi360 Letter’’) (questioning the importance of investor choice as the principal benefit of Rule 206(3)–3T); Comment Letter of National Association of Personal Financial Advisors (Dec. 20, 2010) (‘‘NAPFA Letter’’) (questioning the benefits of the rule in: (1) Providing protections of the sales practice rules of the Exchange Act and the relevant self-regulatory organizations; (2) allowing nondiscretionary advisory clients of advisory firms that are also registered as broker-dealers to have easier access to a wider range of securities which, in turn, should continue to lead to increased liquidity in the markets for these securities; (3) maintaining investor choice; and (4) promoting capital formation). 33 See 2007 Principal Trade Rule Release, Section I.B. PO 00000 Frm 00021 Fmt 4702 Sfmt 4702 48713 comment.34 While we understand the view that numerous and severe violations of trust could impede capital formation, we have not seen any evidence that rule 206(3)–3T has caused this result. The staff has not identified instances where an adviser has used the temporary rule to ‘‘dump’’ unmarketable securities or securities that the adviser believes may decline in value into an advisory account, a harm that section 206(3) and the conditions and limitations of rule 206(3)–3T are designed to redress.35 In addition, nondiscretionary advisory account clients benefit from the protections of sales practice rules under the Exchange Act and of relevant self-regulatory organizations, and the fiduciary duty and other obligations imposed by the Advisers Act. We also received comments on the 2007 Principal Trade Rule Release from commenters who opposed the limitation of the temporary rule to investment advisers that are registered with us as broker-dealers, as well as to accounts that are subject to both the Advisers Act and Exchange Act as providing a competitive advantage to investment advisers that are registered with us as broker-dealers.36 Based on our experience with the rule to date, and as we noted in previous releases, we have no reason to believe that broker-dealers (or affiliated but separate investment advisers and broker-dealers) are put at a competitive disadvantage to advisers that are themselves also registered as broker-dealers.37 We intend to continue to evaluate the effects of the rule on efficiency, competition, and capital formation in connection with our broader consideration of the regulatory requirements applicable to brokerdealers and investment advisers. If the Commission allowed the rule to expire, firms would no longer incur the costs associated with rule 206(3)–3T, including the operational costs associated with complying with the rule.38 In the 2007 Principal Trade Rule Release, we presented estimates of the costs of each of the rule’s disclosure 34 See NAPFA Letter. 2010 Extension Proposing Release, Section II (noting that the staff did not identify instances of ‘‘dumping’’ in connection with OCIE’s examinations regarding compliance with the temporary rule). 36 See Comment Letter of the Financial Planning Association (Nov. 30, 2007); Comment Letter of the American Bar Association, section of Business Law’s Committee on Federal Regulation of Securities (Apr. 18, 2008). See also 2009 Extension Release, Section VI. 37 See 2009 Extension Release, Section VI; 2010 Extension Release, Section VI; 2012 Extension Release, Section V. 38 See supra n. 25. 35 See E:\FR\FM\18AUP1.SGM 18AUP1 48714 Federal Register / Vol. 79, No. 159 / Monday, August 18, 2014 / Proposed Rules elements, including: Prospective disclosure and consent; transaction-bytransaction 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. Although one commenter on the 2012 extension noted that the Commission’s cost analysis had remained unchanged since 2007, the commenter did not provide any supporting information discrediting the cost analysis we presented in the 2007 Principal Trade Rule Release.39 We do not believe the extension we are proposing today would affect the cost estimates associated with the rule.40 Furthermore, we believe that an eligible adviser that begins to rely on Rule 206(3)–T today would bear the same upfront and ongoing cost estimates set forth in the 2007 Principal Trade Rule Release.41 If the rule is adopted on a permanent basis, then there may be additional economic effects. We recognize that a temporary rule, by nature, creates uncertainty, which in turn, may result in a reduced ability of firms to coordinate and plan future business activities. The uncertainty with respect to rule 206(3)–3T would be reduced if either the rule was allowed to expire or the rule was adopted on a permanent basis.42 Nonetheless, we believe that it would not be appropriate to adopt the rule on a permanent basis (with any necessary substantive amendments) while consideration of the regulatory requirements applicable to brokerdealers and investment advisers is ongoing. Another reasonable alternative would be to extend the rule for a period other than two years. For example, extending tkelley on DSK3SPTVN1PROD with PROPOSALS 39 See fi360 Letter. See also 2012 Extension Release, Section V.B. 40 In the 2007 Principal Trade Rule Release, we estimated the total overall costs, including estimated costs for all eligible advisers and eligible accounts, relating to compliance with rule 206(3)– 3T to be $37,205,569. See 2007 Principal Trade Rule Release, Section VI.D. 41 See id. 42 We received several comments in connection with prior extensions of the rule urging us to make the rule permanent to avoid such uncertainty. See e.g., Comment Letter of Winslow, Evans & Crocker (Dec. 8, 2009); Comment of Bank of America Corporation (Dec. 20, 2010). VerDate Mar<15>2010 16:52 Aug 15, 2014 Jkt 232001 the rule for greater than two years would provide the Commission with additional time to evaluate the impact of any potential rulemaking or other process that may emerge from the broader consideration of fiduciary obligations and other regulatory requirements applicable to brokerdealers and investment advisers. Should our consideration of the fiduciary obligations and other regulatory requirements applicable to brokerdealers and investment advisers extend beyond the proposed sunset date of the temporary rule, such a longer period may be appropriate for the Commission to consider. On balance, however, we believe that the proposed two-year extension of rule 206(3)–3T appropriately addresses the concerns of firms and clients relying on the rule while the Commission continues its ongoing consideration of the standards applicable to investment advisers and broker-dealers. C. Request for Comment We request comment on all aspects of the economic analysis, including the accuracy of the potential costs and benefits identified and assessed in this release and the prior releases and information on any other costs or benefits that may result from the proposal and from alternatives to the proposal, and whether the proposal, if adopted, would promote efficiency, competition, and capital formation. Commenters are requested to provide quantitative and qualitative data and other information and economic analysis about the costs or benefits to support their views. VI. Initial Regulatory Flexibility Act Analysis The Commission has prepared the following Initial Regulatory Flexibility Analysis (‘‘IRFA’’) regarding the proposed amendment to rule 206(3)–3T in accordance with section 3(a) of the Regulatory Flexibility Act.43 A. Reasons for Proposed Action We are proposing to extend rule 206(3)–3T’s sunset date for two years because we believe that it would not be appropriate to require firms relying on the rule to restructure their operations and client relationships before we complete our broader consideration of the regulatory requirements applicable to broker-dealers and investment advisers. 43 5 PO 00000 U.S.C. 603(a). Frm 00022 Fmt 4702 Sfmt 4702 B. Objectives and Legal Basis The objective of the proposed amendment to rule 206(3)–3T, as discussed above, is to permit firms currently relying on rule 206(3)–3T to limit the need to modify their operations and relationships on multiple occasions, both before and potentially after we complete any regulatory actions regarding the standards of conduct and other obligations applicable to broker-dealers and investment advisers. We are proposing to amend rule 206(3)–3T pursuant to sections 206A and 211(a) of the Advisers Act [15 U.S.C. 80b–6a and 15 U.S.C. 80b–11(a)]. C. Small Entities Subject to the Rule Rule 206(3)–3T is an alternative method of complying with Advisers Act section 206(3) and is available to all investment advisers that: (i) Are registered as broker-dealers under the Exchange Act; and (ii) effect trades with clients directly or indirectly through a broker-dealer controlling, controlled by or under common control with the investment adviser, including small entities. Under Advisers Act rule 0–7, for purposes of the Regulatory Flexibility Act an investment adviser generally is a small entity if it: (i) Has assets under management of less than $25 million; (ii) did not have total assets of $5 million or more on the last day of its most recent fiscal year; and (iii) does not control, is not controlled by, and is not under common control with another investment adviser that has assets under management of $25 million or more, or any person (other than a natural person) that had total assets of $5 million or more on the last day of its most recent fiscal year.44 We estimate that as of June 1, 2014, 464 SEC-registered investment advisers were small entities.45 As discussed in the 2007 Principal Trade Rule Release, we opted not to make the relief provided by rule 206(3)–3T available to all investment advisers, and instead have restricted it to investment advisers that are registered as broker-dealers under the Exchange Act.46 We therefore estimate for purposes of this IRFA that 12 of these small entities (those that are both investment advisers and registered broker-dealers) could rely on rule 206(3)–3T.47 44 See 17 CFR 275.0–7. data as of June 1, 2014. 46 See 2007 Principal Trade Rule Release, Section VIII.B. 47 IARD data as of June 1, 2014. 45 IARD E:\FR\FM\18AUP1.SGM 18AUP1 Federal Register / Vol. 79, No. 159 / Monday, August 18, 2014 / Proposed Rules D. Reporting, Recordkeeping, and Other Compliance Requirements The provisions of rule 206(3)–3T impose certain reporting or recordkeeping requirements, and our proposal, if adopted, would extend the imposition of these requirements for an additional two years. We do not, however, expect that the proposed twoyear extension of the rule’s sunset date would alter these requirements. Rule 206(3)–3T is designed to provide an alternative means of compliance with the requirements of section 206(3) of the Advisers Act. Investment advisers taking advantage of the rule with respect to non-discretionary advisory accounts would be required to make certain disclosures to clients on a prospective, transaction-by-transaction and annual basis. Specifically, rule 206(3)–3T permits an adviser, with respect to a nondiscretionary advisory account, to comply with section 206(3) of the Advisers Act by, among other things: (i) Making certain written disclosures; (ii) obtaining written, revocable consent from the client prospectively authorizing the adviser to enter into principal trades; (iii) making oral or written disclosure and obtaining the client’s consent orally or in writing prior to the execution of each principal transaction; (iv) sending to the client a confirmation statement for each principal trade that discloses the capacity in which the adviser has acted and indicating that the client consented to the transaction; and (v) delivering to the client an annual report itemizing the principal transactions. Advisers are already required to communicate the content of many of the disclosures pursuant to their fiduciary obligations to clients. Other disclosures are already required by rules applicable to brokerdealers. Our proposed amendment, if adopted, only would extend the rule’s sunset date for two years. Advisers currently relying on the rule already should be making the disclosures described above. tkelley on DSK3SPTVN1PROD with PROPOSALS E. Duplicative, Overlapping, or Conflicting Federal Rules We believe that there are no rules that duplicate or conflict with rule 206(3)– 3T, which presents an alternative means of compliance with the procedural requirements of section 206(3) of the Advisers Act that relate to principal transactions. We note, however, that rule 10b–10 under the Exchange Act is a separate confirmation rule that requires brokerdealers to provide certain information to their customers regarding the VerDate Mar<15>2010 16:52 Aug 15, 2014 Jkt 232001 transactions they effect, including whether the broker or dealer is acting as an agent or as a principal for its own account in a given transaction. Furthermore, FINRA rule 2232 requires broker-dealers that are members of FINRA to deliver a written notification in conformity with rule 10b–10 under the Exchange Act containing certain information. Rule G–15 of the Municipal Securities Rulemaking Board also contains a separate confirmation rule that governs transactions in municipal securities, and requires brokers, dealers and municipal securities dealers to disclose, among other things, the capacity in which the firm effected a transaction (i.e., as an agent or principal). In addition, investment advisers that are qualified custodians for purposes of rule 206(4)– 2 under the Advisers Act and that maintain custody of their advisory clients’ assets must send quarterly account statements to their clients pursuant to rule 206(4)–2(a)(3) under the Advisers Act. These rules overlap with certain elements of rule 206(3)–3T, but we designed the temporary rule to work efficiently together with existing rules by permitting firms to incorporate the required disclosure into one confirmation statement. F. Significant Alternatives The Regulatory Flexibility Act directs us to consider significant alternatives that would accomplish our stated objective, while minimizing any significant adverse impact on small entities.48 Alternatives in this category would include: (i) Establishing different compliance or reporting standards or timetables that take into account the resources available to small entities; (ii) clarifying, consolidating, or simplifying compliance requirements under the rule for small entities; (iii) using performance rather than design standards; and (iv) exempting small entities from coverage of the rule, or any part of the rule. We believe that special compliance or reporting requirements or timetables for small entities, or an exemption from coverage for small entities, may create the risk that the investors who are advised by and effect securities transactions through such small entities would not receive adequate disclosure. Moreover, different disclosure requirements could create investor confusion if it creates the impression that small investment advisers have different conflicts of interest with their advisory clients in connection with 48 See PO 00000 5 U.S.C. 603(c). Frm 00023 Fmt 4702 Sfmt 4702 48715 principal trading than larger investment advisers. We believe, therefore, that it is important for the disclosure protections required by the rule to be provided to advisory clients by all advisers, not just those that are not considered small entities. Further consolidation or simplification of the proposals for investment advisers that are small entities would be inconsistent with the Commission’s goals of fostering investor protection. We have endeavored through rule 206(3)–3T to minimize the regulatory burden on all investment advisers eligible to rely on the rule, including small entities, while meeting our regulatory objectives. It was our goal to ensure that eligible small entities may benefit from the Commission’s approach to the rule to the same degree as other eligible advisers. The condition that advisers seeking to rely on the rule must also be registered with us as brokerdealers and that each account with respect to which an adviser seeks to rely on the rule must be a brokerage account subject to the Exchange Act, and the rules thereunder, and the rules of the self-regulatory organization(s) of which the broker-dealer is a member, reflect what we believe is an important element of our balancing between easing regulatory burdens (by affording advisers an alternative means of compliance with section 206(3) of the Act) and meeting our investor protection objectives.49 Finally, we do not consider using performance rather than design standards to be consistent with our statutory mandate of investor protection in the present context. G. Solicitation of Comments We solicit written comments regarding our analysis. We request comment on whether the rule will have any effects that we have not discussed. We request that commenters describe the nature of any impact on small entities and provide empirical data to support the extent of the impact. Do small investment advisers believe an alternative means of compliance with section 206(3) should be available to them? VII. Consideration of Impact on the Economy For purposes of the Small Business Regulatory Enforcement Fairness Act of 49 See 2007 Principal Trade Rule Release, Section II.B.7 (noting commenters that objected to this condition as disadvantaging small broker-dealers (or affiliated but separate investment advisers and broker-dealers)). E:\FR\FM\18AUP1.SGM 18AUP1 48716 Federal Register / Vol. 79, No. 159 / Monday, August 18, 2014 / Proposed Rules 1996, or ‘‘SBREFA,’’ 50 we must advise OMB whether a proposed regulation constitutes a ‘‘major’’ rule. Under SBREFA, a rule is considered ‘‘major’’ where, if adopted, it results in or is likely to result in: (1) An annual effect on the economy of $100 million or more; (2) a major increase in costs or prices for consumers or individual industries; or (3) significant adverse effects on competition, investment or innovation. We request comment on the potential impact of the proposed amendment on the economy on an annual basis. Commenters are requested to provide empirical data and other factual support for their views to the extent possible. VIII. Statutory Authority The Commission is proposing to amend rule 206(3)–3T pursuant to sections 206A and 211(a) of the Advisers Act [15 U.S.C. 80b–6a and 80b–11(a)]. List of Subjects in 17 CFR Part 275 Investment advisers, Reporting and recordkeeping requirements. Text of Proposed Rule Amendment For the reasons set out in the preamble, Title 17, Chapter II of the Code of Federal Regulations is proposed to be amended as follows. PART 275—RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940 1. The authority citation for part 275 continues to read in part as follows: ■ Authority: 15 U.S.C. 80b–2(a)(11)(G), 80b– 2(a)(11)(H), 80b–2(a)(17), 80b–3, 80b–4, 80b– 4a, 80b–6(4), 80b–6a, and 80b–11, unless otherwise noted. * * * * § 275.206(3)–3T * [Amended] 2. In § 275.206(3)–3T, amend paragraph (d) by removing the words ‘‘December 31, 2014’’ and adding in their place ‘‘December 31, 2016’’. tkelley on DSK3SPTVN1PROD with PROPOSALS ■ By the Commission. Dated: August 12, 2014. Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2014–19421 Filed 8–15–14; 8:45 am] BILLING CODE 8011–01–P 50 Public Law 104–121, Title II, 110 Stat. 857 (1996) (codified in various sections of 5 U.S.C., 15 U.S.C. and as a note to 5 U.S.C. 601). VerDate Mar<15>2010 16:52 Aug 15, 2014 Jkt 232001 DEPARTMENT OF DEFENSE Department of the Army, Corps of Engineers 33 CFR Part 334 United States Navy Restricted Area, Supervisor of Shipbuilding, Conversion and Repair, USN, Gulf Coast, Pascagoula, Mississippi AGENCY: U.S. Army Corps of Engineers, DoD. Notice of proposed rulemaking and request for comments. ACTION: The U.S. Army Corps of Engineers (Corps) is proposing to establish a restricted area around the Huntington Ingalls Incorporated/Ingalls Shipbuilding and Dry Dock (HII) facility located in Pascagoula Mississippi, because of the sensitive nature of the on-going and potential future activities at that facility. The Supervisor of Shipbuilding, Conversion and Repair, Gulf Coast, located in Pascagoula, Mississippi is responsible for United States Navy shipbuilding activities at the HII facility, USA located in Pascagoula, Mississippi. The proposed restricted area will be used for on-going construction when vessels are placed in the water. The proposed restricted area is essential to protect persons and property from the dangers associated with the operation and safeguard the area from accidents, sabotage and other subversive acts. DATES: Written comments must be submitted on or before September 17, 2014. ADDRESS: You may submit comments, identified by docket number COE– 2014–0008, by any of the following methods: Federal eRulemaking Portal: http:// www.regulations.gov. Follow the instructions for submitting comments. Email: david.b.olson@usace.army.mil. Include the docket number COE–2014– 0008 in the subject line of the message. Mail: U.S. Army Corps of Engineers, Attn: CECW–CO (David B. Olson), 441 G Street NW., Washington, DC 20314– 1000. Hand Delivery/Courier: Due to security requirements, we cannot receive comments by hand delivery or courier. Instructions: Direct your comments to docket number COE–2014–0008. All comments received will be included in the public docket without change and may be made available on-line at http://regulations.gov, including any personal information provided, unless the commenter indicates that the SUMMARY: PO 00000 Frm 00024 Fmt 4702 Sfmt 4702 comment includes information claimed to be Confidential Business Information (CBI) or other information whose disclosure is restricted by statute. Do not submit information that you consider to be CBI, or otherwise protected, through regulations.gov or email. The regulations.gov Web site is an anonymous access system, which means we will not know your identity or contact information unless you provide it in the body of your comment. If you send an email directly to the Corps without going through regulations.gov, your email address will be automatically captured and included as part of the comment that is placed in the public docket and made available on the Internet. If you submit an electronic comment, we recommend that you include your name and other contact information in the body of your comment and with any disk or CD–ROM you submit. If we cannot read your comment because of technical difficulties and cannot contact you for clarification, we may not be able to consider your comment. Electronic comments should avoid the use of any special characters, any form of encryption, and be free of any defects or viruses. Docket: For access to the docket to read background documents or comments received, go to www.regulations.gov. All documents in the docket are listed. Although listed in the index, some information is not publicly available, such as CBI or other information whose disclosure is restricted by statute. Certain other material, such as copyrighted material, is not placed on the Internet and will be publicly available only in hard copy form. FOR FURTHER INFORMATION CONTACT: Mr. David Olson, Headquarters, Operations and Regulatory Community of Practice, Washington, DC at 202–761–4922 or Mr. Philip A. Hegji, U.S. Army Corps of Engineers, Mobile District, at 251–690– 3222. SUPPLEMENTARY INFORMATION: The Supervisor of Shipbuilding, Conversion and Repair, Gulf Coast, located in Pascagoula, Mississippi is responsible for United States Navy shipbuilding activities at HII located in Pascagoula, Mississippi. In accordance with Department of Defense and Department of the Navy guidance, the SUPERVISOR is responsible for the antiterrorism efforts and force protection of Department of the Navy assets under his or her charge. In response to a request by the United States Navy, and pursuant to its authorities in Section 7 of the Rivers E:\FR\FM\18AUP1.SGM 18AUP1

Agencies

[Federal Register Volume 79, Number 159 (Monday, August 18, 2014)]
[Proposed Rules]
[Pages 48709-48716]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-19421]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 275

[Release No. IA-3893; File No. S7-23-07]
RIN 3235-AL56


Temporary Rule Regarding Principal Trades With Certain Advisory 
Clients

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission is proposing to amend 
rule 206(3)-3T under the Investment Advisers Act of 1940, a temporary 
rule that establishes an alternative means for investment advisers that 
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. The amendment would extend the date on which rule 
206(3)-3T will sunset from December 31, 2014 to December 31, 2016.

DATES: Comments must be received on or before September 17, 2014.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number S7-23-07 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments to Secretary, Securities and Exchange 
Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number S7-23-07. This file number 
should be included on the subject line if email is used. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's 
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments 
are also available for Web site viewing and printing in the 
Commission's Public Reference Room, 100 F Street NE., Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. All comments received will be posted without change; we do 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Melissa S. Gainor, Senior Counsel, 
Sarah A. Buescher, Branch Chief, or Daniel S. Kahl, Assistant Director, 
at (202) 551-6787 or IArules@sec.gov, Investment Adviser Regulation 
Office, Division of Investment Management, U.S. Securities and Exchange 
Commission, 100 F Street NE., Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission is 
proposing an amendment to temporary rule 206(3)-3T [17 CFR 275.206(3)-
3T] under the Investment Advisers Act of 1940 [15 U.S.C. 80b] that 
would extend the date on which the rule will sunset from December 31, 
2014 to December 31, 2016.

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 that 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 DC 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 with an advisory component 
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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    As initially adopted on an interim final basis, rule 206(3)-3T was 
set to sunset on December 31, 2009. In December 2009, however, we 
adopted rule 206(3)-3T as a final rule in the same form in which it was 
adopted on an interim final basis in 2007, except that we extended the 
rule's sunset date by one year to December 31, 2010.\5\ We

[[Page 48710]]

deferred final action on rule 206(3)-3T in December 2009 because we 
needed additional time to understand how, and in what situations, the 
rule was being used.\6\
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    \5\ See Temporary Rule Regarding Principal Trades with Certain 
Advisory Clients, Investment Advisers Act Release No. 2965 (Dec. 23, 
2009) [74 FR 69009 (Dec. 30, 2009)] (``2009 Extension Release''); 
Temporary Rule Regarding Principal Trades with Certain Advisory 
Clients, Investment Advisers Act Release No. 2965A (Dec. 31, 2009) 
[75 FR 742 (Jan. 6, 2010)] (making a technical correction to the 
2009 Extension Release).
    \6\ See 2009 Extension Release, Section II.c.
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    In both December 2010 and December 2012, we further extended the 
rule's sunset date, in each case for an additional two-year period.\7\ 
We deferred final action on rule 206(3)-3T in 2010 in order to complete 
a study required by section 913 of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act (the ``Dodd-Frank Act'').\8\ In 2012, we 
deferred final action on rule 206(3)-3T to further consider the 
findings, conclusions, and recommendations of the 913 Study and the 
comments we had received from interested parties.\9\ In connection with 
each extension, we noted that our consideration of the regulatory 
requirements applicable to broker-dealers and investment advisers was 
ongoing and that an extension would allow the Commission to consider 
more broadly the regulatory requirements applicable to broker-dealers 
and investment advisers, including whether rule 206(3)-3T should be 
substantively modified, supplanted, or permitted to sunset.\10\
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    \7\ See Temporary Rule Regarding Principal Trades with Certain 
Advisory Clients, Investment Advisers Act Release No. 3118 (Dec. 1, 
2010) [75 FR 75650 (Dec. 6, 2010)] (proposing a two-year extension 
of rule 206(3)-3T's sunset provision) (``2010 Extension Proposing 
Release''); Temporary Rule Regarding Principal Trades with Certain 
Advisory Clients, Investment Advisers Act Release No. 3128 (Dec. 28, 
2010) [75 FR 82236 (Dec. 30, 2010)] (extending rule 206(3)-3T's 
sunset provision from December 31, 2010 to December 31, 2012) 
(``2010 Extension Release''); Temporary Rule Regarding Principal 
Trades with Certain Advisory Clients, Investment Advisers Act 
Release No. 3483 (Oct. 9, 2012) [77 FR 62185 (Oct. 12, 2012)] 
(proposing a two-year extension of rule 206(3)-3T's sunset 
provision); Temporary Rule Regarding Principal Trades with Certain 
Advisory Clients, Investment Advisers Act Release No. 3522 (Dec. 20, 
2012) [77 FR 76854 (Dec. 31, 2012)] (extending rule 206(3)-3T's 
sunset provision from December 31, 2012 to December 31, 2014) 
(``2012 Extension Release'').
    \8\ Public Law 111-203, 124 Stat. 1376 (2010). Under section 913 
of the Dodd-Frank Act, we were required to conduct a study and 
provide a report to Congress concerning the obligations of broker-
dealers and investment advisers, including standards of care 
applicable to those intermediaries and their associated persons. 
Section 913 also authorizes us to promulgate rules concerning the 
legal or regulatory standards of care for broker-dealers, investment 
advisers, and persons associated with these intermediaries for 
providing personalized investment advice about securities to retail 
customers, taking into account the findings, conclusions, and 
recommendations of the study.
    The study mandated by section 913 of the Dodd-Frank Act was 
prepared by the staff and delivered to Congress on January 21, 2011. 
See Study on Investment Advisers and Broker-Dealers (``913 Study'') 
(Jan. 21, 2011), available at http://www.sec.gov/news/studies/2011/913studyfinal.pdf. For a discussion regarding principal trading, see 
section IV.C.1.(b) of the 913 Study. See also Commissioners Kathleen 
L. Casey and Troy A. Paredes, Statement by SEC Commissioners: 
Statement Regarding Study on Investment Advisers and Broker-Dealers 
(Jan. 21, 2011), available at http://www.sec.gov/news/speech/2011/spch012211klctap.htm (opposing the release of the 913 Study to 
Congress and stating that more rigorous analysis is required before 
the Commission engages in any follow-on rulemaking).
    \9\ See 2012 Extension Release, Section II.
    \10\ See id.; 2010 Extension Release, Section II.
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    We have continued to consider the regulatory requirements 
applicable to broker-dealers and investment advisers. In 2013, we 
issued a request for data and other information, including quantitative 
data and economic analysis, relating to the benefits and costs that 
could result from alternative approaches regarding the standards of 
conduct and other obligations of broker-dealers and investment 
advisers.\11\ The staff has received over 200 comment letters in 
response to the Request, several of which discussed rule 206(3)-3T, and 
Commissioners and the staff have held numerous meetings with interested 
parties.\12\ None of the comment letters provided quantitative or 
qualitative information regarding the effects of the temporary rule.
---------------------------------------------------------------------------

    \11\ Duties of Brokers, Dealers, and Investment Advisers, 
Investment Advisers Act Release No. 3558 (Mar. 1, 2013) [78 FR 14848 
(Mar. 7, 2013)] (the ``Request'').
    \12\ See Comments on Study Regarding Obligations of Brokers, 
Dealers, and Investment Advisers, File No. 4-606, available at 
http://sec.gov/comments/4-606/4-606.shtml. See e.g., Comment Letter 
of Consumer Federation of America (Jul. 5, 2013) (``[B]y considering 
revisions to the principal trading rules as part of the fiduciary 
rulemaking, the Commission could arrive at a workable approach that 
is consistent for brokers and investment advisers and provides 
improved protections for investors.''); Comment Letter of North 
American Securities Administrators Association, Inc. (Jul. 5, 2013) 
(``[T]he Commission should consider SEC Rule 206(3)-3T as part of 
future fiduciary standard rulemaking.''); Comment Letter of 
Securities Industry and Financial Markets Association (``SIFMA'') 
(Jul. 5, 2013) (``SIFMA 2013 Letter'') (including survey results 
regarding the dollar amount of principal transactions engaged in 
with retail clients during 2012).
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 II. Discussion

    We are proposing to amend rule 206(3)-3T to extend the rule's 
sunset date by two additional years.\13\ Absent further action by the 
Commission, the rule will sunset on December 31, 2014. We are proposing 
this extension because we continue to believe that the issues raised by 
principal trading, including the restrictions in section 206(3) of the 
Advisers Act and our experiences with, and observations regarding, the 
operation of rule 206(3)-3T, should be considered as part of our 
broader consideration of the regulatory requirements applicable to 
broker-dealers and investment advisers in connection with the Dodd-
Frank Act.\14\
---------------------------------------------------------------------------

    \13\ The rule includes a reference to an ``investment grade debt 
security,'' which is defined as ``a non-convertible debt security 
that, at the time of sale, is rated in one of the four highest 
rating categories of at least two nationally recognized statistical 
rating organizations (as defined in section 3(a)(62) of the Exchange 
Act).'' Rule 206(3)-3T(a)(2) and (c). Section 939A of the Dodd-Frank 
Act requires that we ``review any regulation issued by [us] that 
requires the use of an assessment of the credit-worthiness of a 
security or money market instrument; and any references to or 
requirements in such regulations regarding credit ratings.'' Once we 
have completed that review, the statute provides that we modify any 
regulations identified in our review to ``remove any reference to or 
requirement of reliance on credit ratings and to substitute in such 
regulations such standard of credit-worthiness'' as we determine to 
be appropriate. We believe that the credit rating requirement in the 
temporary rule would be better addressed after the Commission 
completes its review of the regulatory standards of conduct that 
apply to broker-dealers and investment advisers. Therefore, we are 
not proposing any substantive amendments to the rule at this time. 
See generally Report on Review of Reliance on Credit Ratings (July 
21, 2011), available at http://www.sec.gov/news/studies/2011/939astudy.pdf (staff study reviewing the use of credit ratings in 
Commission regulations).
    \14\ The 913 Study is one of several studies relevant to the 
regulation of broker-dealers and investment advisers mandated by the 
Dodd-Frank Act. See, e.g., Study on Enhancing Investment Adviser 
Examinations (Jan. 19, 2011), available at http://sec.gov/news/studies/2011/914studyfinal.pdf (staff study required by section 914 
of the Dodd-Frank Act, which directed the Commission to review and 
analyze the need for enhanced examination and enforcement resources 
for investment advisers); Commissioner Elisse B. Walter, Statement 
on Study Enhancing Investment Adviser Examinations (Required by 
Section 914 of Title IV of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act) (Jan. 19, 2011), available at http://sec.gov/news/speech/2011/spch011911ebw.pdf. See also Study and 
Recommendations on Improved Investor Access to Registration 
Information About Investment Advisers and Broker-Dealers (Jan. 26, 
2011), available at http://sec.gov/news/studies/2011/919bstudy.pdf 
(staff study required by section 919B of the Dodd-Frank Act, that 
directed the Commission to complete a study, including 
recommendations (some of which have been implemented) of ways to 
improve investor access to registration information about investment 
advisers and broker dealers, and their associated persons); United 
States Government Accountability Office Report to Congressional 
Committees on Private Fund Advisers (July 11, 2011), available at 
http://www.gao.gov/new.items/d11623.pdf (study required by section 
416 of the Dodd-Frank Act, which directed the Comptroller General of 
the United States to study the feasibility of forming an self-
regulatory organization to oversee private funds).
---------------------------------------------------------------------------

    As noted above, section 913 of the Dodd-Frank Act authorizes us to 
promulgate rules concerning, among other things, the legal or 
regulatory standards of conduct for broker-dealers, investment 
advisers, and persons associated with these intermediaries when 
providing personalized investment advice about securities to

[[Page 48711]]

retail customers. Since the completion of the 913 Study in 2011, we 
have been considering the findings, conclusions, and recommendations of 
the study and the comments we have received from interested 
parties.\15\ The Commission and its staff have continued to focus on 
evaluating options regarding regulatory requirements applicable to 
broker-dealers and investment advisers, taking into account the 913 
Study's recommendations, the views of investors and other interested 
market participants, potential economic and market impacts, and the 
information we received in response to the Request in 2013. Staff has 
also been engaged in examinations of dual registrants and is assessing 
the impact to investors of the different supervisory structures and 
legal standards of conduct that govern the provision of brokerage and 
investment advisory services, which may help inform our 
considerations.\16\ At this time, our consideration of the regulatory 
requirements applicable to broker-dealers and investment advisers is 
ongoing. We do not expect to complete our consideration of these issues 
before December 31, 2014, the current sunset date for rule 206(3)-3T.
---------------------------------------------------------------------------

    \15\ Section 913(f) of the Dodd-Frank Act requires us to 
consider the 913 Study in any rulemaking authorized by that section 
of the Dodd-Frank Act.
    \16\ See National Exam Program, Office of Compliance Inspections 
and Examinations, Examination Priorities for 2014 (Jan. 9, 2014), 
available at http://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2014.pdf.
---------------------------------------------------------------------------

    If we permit rule 206(3)-3T to sunset on December 31, 2014, after 
that date investment advisers registered with us as broker-dealers that 
currently rely on rule 206(3)-3T would be required to comply with 
section 206(3)'s transaction-by-transaction written disclosure and 
consent requirements without the benefit of the alternative means of 
complying with these requirements currently provided by rule 206(3)-3T. 
This could limit the access of non-discretionary advisory clients of 
advisory firms that are registered with us as broker-dealers to certain 
securities.\17\ In addition, firms may be required to make substantial 
changes to their disclosure documents, client agreements, procedures, 
and systems.
---------------------------------------------------------------------------

    \17\ For a discussion of the costs and benefits underlying rule 
206(3)-3T, see 2007 Principal Trade Rule Release, Section VI.C.
---------------------------------------------------------------------------

    We believe that the requirements of rule 206(3)-3T, coupled with 
regulatory oversight, will adequately protect advisory clients for an 
additional limited period of time while we consider more broadly the 
regulatory requirements applicable to broker-dealers and investment 
advisers.\18\ Since its adoption and throughout the period of the 
proposed extension, the staff has examined and would continue to 
examine firms that engage in principal transactions and will take 
appropriate action to help ensure that firms are complying with section 
206(3) or rule 206(3)-3T (as applicable), including possible 
enforcement action.\19\ Since the last extension, examination staff 
also requested and received materials from a sample of dual registrants 
in 2014 to observe the use of the rule by these firms.\20\ This 
examination showed that a number of the firms that were contacted by 
staff relied on the rule and that those firms had adopted written 
policies and procedures under rule 206(4)-7 that are designed to comply 
with the requirements of the temporary rule.\21\ Based on the review, 
it appeared to the staff that the firms relying on the rule had 
processes in place for the purpose of effecting principal transactions 
in compliance with the requirements of the temporary rule.
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    \18\ In addition, rule 206(3)-3T(b) provides that the rule does 
not relieve an investment adviser from acting in the best interests 
of its clients, or from any obligation that may be imposed by 
sections 206(1) or (2) of the Advisers Act or any other applicable 
provisions of the federal securities laws.
    \19\ In the 2010 Extension Proposing Release, we discussed 
certain compliance issues identified by the Office of Compliance, 
Inspections and Examinations. See 2010 Extension Proposing Release, 
Section II. One matter identified in the staff's review resulted in 
a settlement of an enforcement proceeding and other matters continue 
to be reviewed by the staff. See In the Matter of Feltl & Company, 
Inc., Investment Advisers Act Release No. 3325 (Nov. 28, 2011) 
(settled order finding, among other things, violations of section 
206(3) of the Advisers Act for certain principal transactions and 
section 206(4) of the Advisers Act and rule 206(4)-7 thereunder for 
failure to adopt written policies and procedures reasonably designed 
to prevent violations of the Advisers Act and its rules).
    \20\ Staff identified a representative sample set of dual 
registrants based on Form ADV data, including firm disclosures on 
Form ADV Part 2A, and requested materials from the firms that 
included compliance policies and procedures, sample disclosures, and 
data regarding the firm's principal transactions with advisory 
accounts. See also infra note 27.
    \21\ 17 CFR 275.206(4)-7. See also 2007 Principal Trade Rule 
Release (noting that an adviser relying on rule 206(3)-3T as an 
alternative means of complying with section 206(3) must have adopted 
and implemented written policies and procedures reasonably designed 
to comply with the requirements of the rule).
---------------------------------------------------------------------------

    In light of these considerations, we believe that it is not 
appropriate to require firms currently relying on the rule to 
restructure their operations and client relationships before we 
complete our consideration of the standards of conduct and regulatory 
requirements applicable to broker-dealers and investment advisers. To 
the extent our consideration of these issues leads to new rules 
concerning principal trading, these firms would be required to 
restructure their operations and client relationships, potentially at 
substantial expense.
    As part of our broader consideration of the regulatory requirements 
applicable to broker-dealers and investment advisers, we intend to 
carefully consider principal trading by advisers, including whether 
rule 206(3)-3T should be substantively modified, supplanted, or 
permitted to sunset. In making these determinations, we will consider, 
among other things: The 913 Study; relevant comments and information 
received in connection with the 913 Study, the Request, and any 
rulemaking that may follow; the results of our staff's evaluation of 
the operation of rule 206(3)-3T; the information received in connection 
with the review of dual registrants; and comments we receive on rule 
206(3)-3T in connection with this proposed extension.

III. Request for Comment

    We request comment on our proposal to extend rule 206(3)-3T's 
sunset date for two additional years.
     Should we allow the rule to sunset?
     If so, what costs would advisers that currently rely on 
the rule incur? What would be the impact on their clients?
     If we allow the rule to sunset, should we consider 
exemptive requests from investment advisers that are registered with us 
as broker-dealers for exemptive orders providing an alternative means 
of compliance with section 206(3)?
     Are there any developments since the last extension that 
would make an extension not appropriate?
     If we extend the rule's sunset date, is two years an 
appropriate period of time to extend the sunset date? Or should we 
extend the rule's sunset date for a different period of time? If so, 
for how long?
     Is it appropriate to extend rule 206(3)-3T's sunset date 
for a limited period of time in its current form while we complete our 
broader consideration of the regulatory requirements applicable to 
broker-dealers and investment advisers?

IV. Paperwork Reduction Act

    Rule 206(3)-3T contains ``collection of information'' requirements 
within the meaning of the Paperwork Reduction Act of 1995.\22\ The 
Office of Management and Budget (``OMB'') last approved the collection 
of information with an expiration date of July 31, 2017. An agency may 
not conduct or sponsor,

[[Page 48712]]

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.
---------------------------------------------------------------------------

    \22\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    The amendment to the rule we are proposing today--to extend rule 
206(3)-3T's sunset date for two years--does not affect the current 
annual aggregate estimated hour burden of 139,358 hours.\23\ Therefore, 
we are not revising the Paperwork Reduction Act burden and cost 
estimates submitted to OMB as a result of this proposed amendment.
---------------------------------------------------------------------------

    \23\ See Proposed Collection; Comment Request, 78 FR 72932 (Dec. 
4, 2013); Submission for OMB Review; Comment Request, 79 FR 7481 
(Feb. 7, 2014).
---------------------------------------------------------------------------

    We request comment on whether the estimates continue to be 
reasonable. Have circumstances changed such that these estimates (or 
the underlying assumptions embedded in these estimates) should be 
modified or revised? Persons submitting comments should direct the 
comments to the Office of Management and Budget, Attention: Desk 
Officer for the Securities and Exchange Commission, Office of 
Information and Regulatory Affairs, Washington, DC 20503, and should 
send a copy to Secretary, Securities and Exchange Commission, 100 F 
Street NE., Washington, DC 20549-1090, with reference to File No. S7-
23-07.

V. Economic Analysis

A. Introduction

    The Commission is sensitive to the economic effects, including the 
benefits and costs and the effects on efficiency, competition, and 
capital formation, that would result from extending rule 206(3)-3T's 
sunset date for two years.\24\ The economic effects considered in 
proposing this extension are discussed below.
---------------------------------------------------------------------------

    \24\ 15 U.S.C. 80b-2(c). 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 action will promote efficiency, 
competition, and capital formation.
---------------------------------------------------------------------------

    Rule 206(3)-3T provides an alternative means for investment 
advisers that are registered with the Commission 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 their non-
discretionary advisory clients. Other than proposing to extend rule 
206(3)-3T's sunset date for two years, we are not otherwise proposing 
to modify the rule from its current form. We are proposing to extend 
rule 206(3)-3T in its current form to avoid disruption to firms and 
clients that rely on the rule while the Commission continues its 
ongoing consideration of the regulatory requirements applicable to 
broker-dealers and investment advisers and the recommendations from the 
913 Study. In particular, an extension of the current rule would permit 
firms to continue to offer, and clients to have access to, certain 
securities on a principal basis without being required to restructure 
their operations and client relationships, adjust to a new set of 
rules, or abandon the operational systems established to comply with 
the current rule--potentially only to have to do so again when the rule 
expires or is modified, and once more if the Commission adopts a new 
approach to principal trading in connection with the broader 
consideration of the regulatory requirements applicable to broker-
dealers and investment advisers. We previously considered and discussed 
the economic effects of rule 206(3)-3T in its current form in the 2007 
Principal Trade Rule Release, the 2009 Extension Release, the 2010 
Extension Release, and the 2012 Extension Release.\25\
---------------------------------------------------------------------------

    \25\ See 2007 Principal Trade Rule Release, Sections VI-VII; 
2009 Extension Release, Sections V-VI; 2010 Extension Release, 
Sections V-VI; 2012 Extension Release, Sections V-VI.
---------------------------------------------------------------------------

    At the outset, the Commission notes that, where possible, it has 
sought to quantify the costs, benefits, and effects on efficiency, 
competition, and capital formation expected to result from extending 
rule 206(3)-3T and its reasonable alternatives. In many cases, however, 
the Commission is unable to quantify the economic effects because it 
lacks the information necessary to provide a reasonable estimate.\26\ 
The staff has also not found other information, including through 
examinations and comment letters, which impacts the discussion of 
economic effects in previous releases. We will continue to assess the 
rule's operation and impacts along with intervening developments during 
the period of the proposed extension.
---------------------------------------------------------------------------

    \26\ In previous releases, the Commission has requested comment 
on the economic effects of rule 206(3)-3T, the economic effects of 
extending the rule, and the economic effects of alternatives. The 
Commission has not received comments providing quantitative data 
regarding the economic effects of extensions of rule 206(3)-3T, or 
to alternatives of the rule.
---------------------------------------------------------------------------

    The temporary rule currently in effect serves as the economic 
baseline against which the costs and benefits, as well as the impact on 
efficiency, competition, and capital formation, of the amendment are 
discussed. The proposed amendment, which will extend rule 206(3)-3T's 
sunset date by an additional two years, will affect investment advisers 
that are registered with the Commission as broker-dealers and engage 
in, or may consider engaging in, principal transactions with non-
discretionary advisory clients, as well as the non-discretionary 
advisory clients of these firms that engage in, or may consider 
engaging in, principal transactions.
    Although the extent to which firms currently rely on the rule is 
unknown, based on IARD data as of June 1, 2014, there are 97 dual 
registrants that may rely on the rule.\27\ Past comment letters also 
have indicated that since its implementation in 2007, both large and 
small advisers have relied upon the rule.\28\ Additionally, one comment 
letter to the Request in 2013 provided survey results regarding the 
dollar amount of principal transactions that a small number of firms 
engaged in with retail clients in 2012.\29\ Because the economic 
effects of extending the rule and its reasonable alternatives will 
depend on the extent to which eligible firms rely on the rule to engage 
in principal transactions with non-discretionary

[[Page 48713]]

advisory clients, the economic effects could vary significantly among 
firms and their clients.
---------------------------------------------------------------------------

    \27\ Based on IARD data as of June 2, 2014, there are 290 SEC-
registered advisers that are also registered as broker-dealers that 
have non-discretionary accounts who could potentially rely on the 
rule; however, only 97 of these dual registrants indicate they 
currently engage in principal transactions on Form ADV. The actual 
number of advisers that engage in principal transactions in reliance 
on the temporary rule is likely smaller. The staff's recent outreach 
to observe the use of the rule by firms found that some of the dual 
registrants in the sample, which was derived based on Form ADV data, 
did not rely on the rule.
    \28\ For example, SIFMA's 2012 comment letter included survey 
results from seven dual-registrant firms that, in the aggregate, 
manage over $325 billion of assets in over 1.1 million non-
discretionary advisory accounts. The firms indicated that 459,507 
non-discretionary advisory accounts (with aggregate assets of over 
$125 billion) were eligible to engage in principal trading in 
reliance on the rule. These firms also indicated that, during 2010-
2012, the firms engaged in principal trades in reliance on Rule 
206(3)-3T with respect to 106,682 accounts and executed an average 
of 12,009 principal trades per month in reliance on the rule. 
Comment letter of SIFMA (Nov. 13, 2012). See also Comment Letter of 
Wells Fargo Advisors (Nov. 13, 2012) (noting that the firm managed 
232,437 non-discretionary advisory accounts in which hundreds of 
principal trades are made on a monthly basis for the benefit of 
investors).
    \29\ See SIFMA 2013 Letter, supra note 12. Ten firms responded 
to SIFMA's survey and reported that they relied on the temporary 
rule for $8 billion in principal transactions across 163,000 retail 
non-discretionary advisory accounts. In comparison, the ten firms 
engaged in $36 billion in principal transaction with 498,000 retail 
advisory accounts under section 206(3) of the Advisers Act and $809 
billion in principal transactions with 2,480,000 retail brokerage 
accounts.
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B. Analysis of the Proposed Extension and Alternatives

    As noted above, the temporary rule currently in effect serves as 
the economic baseline against which the costs and benefits, as well as 
the impact on efficiency, competition, and capital formation, of the 
amendment are discussed. Because the extension of the sunset date in 
the temporary rule maintains the status quo, we do not expect 
additional costs or benefits to result from the extension. For the same 
reason, we also do not expect the extension to have additional effects 
on efficiency, competition or capital formation. Extending the current 
rule would provide the Commission with additional time to consider 
principal trading as part of the broader consideration of the 
regulatory requirements applicable to broker-dealers and investment 
advisers.
    Two reasonable alternatives to extending the current rule include 
allowing the rule to expire and adopting the rule on a permanent basis. 
If the rule is allowed to expire, then an adviser that is registered as 
a broker-dealer would no longer have a lower cost and more efficient 
alternative to the requirements under section 206(3) of the Advisers 
Act like that provided by the temporary rule,\30\ and consequently non-
discretionary advisory account clients could lose access to the 
principal accounts of firms that rely on the rule. As noted in the 2012 
Extension Release, greater access to a wider range of securities may 
allow non-discretionary advisory clients to more efficiently allocate 
capital and, in the long term, the more efficient allocation of capital 
may lead to an increase in capital formation.\31\ If the rule expires, 
the loss of access by non-discretionary advisory clients to a wider 
range of securities would reduce the ability of these investors to 
efficiently allocate capital and therefore could reduce any resulting 
long-term gains to capital formation. Allowing the rule to expire also 
would reduce the ability of investors to choose between brokerage 
accounts and advisory accounts if the investor wishes to maintain 
access to securities held in firm principal accounts, and may force 
non-discretionary advisory account clients to bear the costs associated 
with transferring accounts (or lose access to a firm's principal 
accounts). Firms may also bear the potentially substantial costs 
associated with restructuring their operations and client 
relationships. On the other hand, if the rule is allowed to expire, and 
firms engage in principal transactions with advisory account clients 
pursuant to the requirements of section 206(3) of the Act, investors 
will be able to more fully evaluate the conflicts of the principal 
transactions prior to the trades.
---------------------------------------------------------------------------

    \30\ Section 206(3) of the Advisers Act requires an investment 
adviser to provide written conflict-of-interest disclosure 
describing its role as principal when transacting securities from 
its own account and obtain client consent prior to transaction 
completion. Rule 206(3)-3T provides a dual registrant firm the 
option of providing transaction-by-transaction disclosures verbally 
instead of in writing when engaging in principal transactions with 
non-discretionary advisory clients as long as the firm satisfies 
additional requirements before and after the transactions. 
Additional requirements of the temporary rule include the provision 
of a written prospective disclosure to clients describing the 
conflicts arising from principal transactions, acquisition of 
written revocable client consent prospectively authorizing such 
transactions, the provision of transaction-by-transaction 
confirmations, and the provision of annual reports itemizing the 
clients' principal transactions thereafter.
    \31\ 2012 Extension Release, Section V.B.
---------------------------------------------------------------------------

    We continue to believe that non-discretionary advisory client 
access to a wider range of securities is beneficial.\32\ Many clients 
wish to access securities held in firm inventory of a diversified 
broker-dealer, and clients may wish to access these securities through 
their non-discretionary advisory accounts.\33\ We believe that it is 
appropriate to preserve investors' access to the securities available 
through principal transactions made in reliance on rule 206(3)-3T while 
consideration of the regulatory requirements applicable to broker-
dealers and investment advisers is ongoing.
---------------------------------------------------------------------------

    \32\ But see Comment Letter of fi360, Inc. (Nov. 13, 2012) 
(``fi360 Letter'') (questioning the importance of investor choice as 
the principal benefit of Rule 206(3)-3T); Comment Letter of National 
Association of Personal Financial Advisors (Dec. 20, 2010) (``NAPFA 
Letter'') (questioning the benefits of the rule in: (1) Providing 
protections of the sales practice rules of the Exchange Act and the 
relevant self-regulatory organizations; (2) allowing non-
discretionary advisory clients of advisory firms that are also 
registered as broker-dealers to have easier access to a wider range 
of securities which, in turn, should continue to lead to increased 
liquidity in the markets for these securities; (3) maintaining 
investor choice; and (4) promoting capital formation).
    \33\ See 2007 Principal Trade Rule Release, Section I.B.
---------------------------------------------------------------------------

    In connection with the 2010 extension of the rule, a commenter 
argued that rule 206(3)-3T would impede, rather than promote, capital 
formation because it would lead to ``more numerous and more severe 
violations . . . of the trust placed by individual investors in their 
trusted investment adviser'', but did not provide any specific data, 
analysis, or other information in support of its comment.\34\ While we 
understand the view that numerous and severe violations of trust could 
impede capital formation, we have not seen any evidence that rule 
206(3)-3T has caused this result. The staff has not identified 
instances where an adviser has used the temporary rule to ``dump'' 
unmarketable securities or securities that the adviser believes may 
decline in value into an advisory account, a harm that section 206(3) 
and the conditions and limitations of rule 206(3)-3T are designed to 
redress.\35\ In addition, non-discretionary advisory account clients 
benefit from the protections of sales practice rules under the Exchange 
Act and of relevant self-regulatory organizations, and the fiduciary 
duty and other obligations imposed by the Advisers Act.
---------------------------------------------------------------------------

    \34\ See NAPFA Letter.
    \35\ See 2010 Extension Proposing Release, Section II (noting 
that the staff did not identify instances of ``dumping'' in 
connection with OCIE's examinations regarding compliance with the 
temporary rule).
---------------------------------------------------------------------------

    We also received comments on the 2007 Principal Trade Rule Release 
from commenters who opposed the limitation of the temporary rule to 
investment advisers that are registered with us as broker-dealers, as 
well as to accounts that are subject to both the Advisers Act and 
Exchange Act as providing a competitive advantage to investment 
advisers that are registered with us as broker-dealers.\36\ Based on 
our experience with the rule to date, and as we noted in previous 
releases, we have no reason to believe that broker-dealers (or 
affiliated but separate investment advisers and broker-dealers) are put 
at a competitive disadvantage to advisers that are themselves also 
registered as broker-dealers.\37\ We intend to continue to evaluate the 
effects of the rule on efficiency, competition, and capital formation 
in connection with our broader consideration of the regulatory 
requirements applicable to broker-dealers and investment advisers.
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    \36\ See Comment Letter of the Financial Planning Association 
(Nov. 30, 2007); Comment Letter of the American Bar Association, 
section of Business Law's Committee on Federal Regulation of 
Securities (Apr. 18, 2008). See also 2009 Extension Release, Section 
VI.
    \37\ See 2009 Extension Release, Section VI; 2010 Extension 
Release, Section VI; 2012 Extension Release, Section V.
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    If the Commission allowed the rule to expire, firms would no longer 
incur the costs associated with rule 206(3)-3T, including the 
operational costs associated with complying with the rule.\38\ In the 
2007 Principal Trade Rule Release, we presented estimates of the costs 
of each of the rule's disclosure

[[Page 48714]]

elements, including: 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. Although one commenter on the 2012 extension noted that the 
Commission's cost analysis had remained unchanged since 2007, the 
commenter did not provide any supporting information discrediting the 
cost analysis we presented in the 2007 Principal Trade Rule 
Release.\39\ We do not believe the extension we are proposing today 
would affect the cost estimates associated with the rule.\40\ 
Furthermore, we believe that an eligible adviser that begins to rely on 
Rule 206(3)-T today would bear the same upfront and ongoing cost 
estimates set forth in the 2007 Principal Trade Rule Release.\41\
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    \38\ See supra n. 25.
    \39\ See fi360 Letter. See also 2012 Extension Release, Section 
V.B.
    \40\ In the 2007 Principal Trade Rule Release, we estimated the 
total overall costs, including estimated costs for all eligible 
advisers and eligible accounts, relating to compliance with rule 
206(3)-3T to be $37,205,569. See 2007 Principal Trade Rule Release, 
Section VI.D.
    \41\ See id.
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    If the rule is adopted on a permanent basis, then there may be 
additional economic effects. We recognize that a temporary rule, by 
nature, creates uncertainty, which in turn, may result in a reduced 
ability of firms to coordinate and plan future business activities. The 
uncertainty with respect to rule 206(3)-3T would be reduced if either 
the rule was allowed to expire or the rule was adopted on a permanent 
basis.\42\ Nonetheless, we believe that it would not be appropriate to 
adopt the rule on a permanent basis (with any necessary substantive 
amendments) while consideration of the regulatory requirements 
applicable to broker-dealers and investment advisers is ongoing.
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    \42\ We received several comments in connection with prior 
extensions of the rule urging us to make the rule permanent to avoid 
such uncertainty. See e.g., Comment Letter of Winslow, Evans & 
Crocker (Dec. 8, 2009); Comment of Bank of America Corporation (Dec. 
20, 2010).
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    Another reasonable alternative would be to extend the rule for a 
period other than two years. For example, extending the rule for 
greater than two years would provide the Commission with additional 
time to evaluate the impact of any potential rulemaking or other 
process that may emerge from the broader consideration of fiduciary 
obligations and other regulatory requirements applicable to broker-
dealers and investment advisers. Should our consideration of the 
fiduciary obligations and other regulatory requirements applicable to 
broker-dealers and investment advisers extend beyond the proposed 
sunset date of the temporary rule, such a longer period may be 
appropriate for the Commission to consider. On balance, however, we 
believe that the proposed two-year extension of rule 206(3)-3T 
appropriately addresses the concerns of firms and clients relying on 
the rule while the Commission continues its ongoing consideration of 
the standards applicable to investment advisers and broker-dealers.

C. Request for Comment

    We request comment on all aspects of the economic analysis, 
including the accuracy of the potential costs and benefits identified 
and assessed in this release and the prior releases and information on 
any other costs or benefits that may result from the proposal and from 
alternatives to the proposal, and whether the proposal, if adopted, 
would promote efficiency, competition, and capital formation. 
Commenters are requested to provide quantitative and qualitative data 
and other information and economic analysis about the costs or benefits 
to support their views.

VI. Initial Regulatory Flexibility Act Analysis

    The Commission has prepared the following Initial Regulatory 
Flexibility Analysis (``IRFA'') regarding the proposed amendment to 
rule 206(3)-3T in accordance with section 3(a) of the Regulatory 
Flexibility Act.\43\
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    \43\ 5 U.S.C. 603(a).
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A. Reasons for Proposed Action

    We are proposing to extend rule 206(3)-3T's sunset date for two 
years because we believe that it would not be appropriate to require 
firms relying on the rule to restructure their operations and client 
relationships before we complete our broader consideration of the 
regulatory requirements applicable to broker-dealers and investment 
advisers.

B. Objectives and Legal Basis

    The objective of the proposed amendment to rule 206(3)-3T, as 
discussed above, is to permit firms currently relying on rule 206(3)-3T 
to limit the need to modify their operations and relationships on 
multiple occasions, both before and potentially after we complete any 
regulatory actions regarding the standards of conduct and other 
obligations applicable to broker-dealers and investment advisers.
    We are proposing to amend rule 206(3)-3T pursuant to sections 206A 
and 211(a) of the Advisers Act [15 U.S.C. 80b-6a and 15 U.S.C. 80b-
11(a)].

C. Small Entities Subject to the Rule

    Rule 206(3)-3T is an alternative method of complying with Advisers 
Act section 206(3) and is available to all investment advisers that: 
(i) Are registered as broker-dealers under the Exchange Act; and (ii) 
effect trades with clients directly or indirectly through a broker-
dealer controlling, controlled by or under common control with the 
investment adviser, including small entities. Under Advisers Act rule 
0-7, for purposes of the Regulatory Flexibility Act an investment 
adviser generally is a small entity if it: (i) Has assets under 
management of less than $25 million; (ii) did not have total assets of 
$5 million or more on the last day of its most recent fiscal year; and 
(iii) does not control, is not controlled by, and is not under common 
control with another investment adviser that has assets under 
management of $25 million or more, or any person (other than a natural 
person) that had total assets of $5 million or more on the last day of 
its most recent fiscal year.\44\
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    \44\ See 17 CFR 275.0-7.
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    We estimate that as of June 1, 2014, 464 SEC-registered investment 
advisers were small entities.\45\ As discussed in the 2007 Principal 
Trade Rule Release, we opted not to make the relief provided by rule 
206(3)-3T available to all investment advisers, and instead have 
restricted it to investment advisers that are registered as broker-
dealers under the Exchange Act.\46\ We therefore estimate for purposes 
of this IRFA that 12 of these small entities (those that are both 
investment advisers and registered broker-dealers) could rely on rule 
206(3)-3T.\47\
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    \45\ IARD data as of June 1, 2014.
    \46\ See 2007 Principal Trade Rule Release, Section VIII.B.
    \47\ IARD data as of June 1, 2014.

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[[Page 48715]]

D. Reporting, Recordkeeping, and Other Compliance Requirements

    The provisions of rule 206(3)-3T impose certain reporting or 
recordkeeping requirements, and our proposal, if adopted, would extend 
the imposition of these requirements for an additional two years. We do 
not, however, expect that the proposed two-year extension of the rule's 
sunset date would alter these requirements.
    Rule 206(3)-3T is designed to provide an alternative means of 
compliance with the requirements of section 206(3) of the Advisers Act. 
Investment advisers taking advantage of the rule with respect to non-
discretionary advisory accounts would be required to make certain 
disclosures to clients on a prospective, transaction-by-transaction and 
annual basis.
    Specifically, rule 206(3)-3T permits an adviser, with respect to a 
non-discretionary advisory account, to comply with section 206(3) of 
the Advisers Act by, among other things: (i) Making certain written 
disclosures; (ii) obtaining written, revocable consent from the client 
prospectively authorizing the adviser to enter into principal trades; 
(iii) making oral or written disclosure and obtaining the client's 
consent orally or in writing prior to the execution of each principal 
transaction; (iv) sending to the client a confirmation statement for 
each principal trade that discloses the capacity in which the adviser 
has acted and indicating that the client consented to the transaction; 
and (v) delivering to the client an annual report itemizing the 
principal transactions. Advisers are already required to communicate 
the content of many of the disclosures pursuant to their fiduciary 
obligations to clients. Other disclosures are already required by rules 
applicable to broker-dealers.
    Our proposed amendment, if adopted, only would extend the rule's 
sunset date for two years. Advisers currently relying on the rule 
already should be making the disclosures described above.

E. Duplicative, Overlapping, or Conflicting Federal Rules

    We believe that there are no rules that duplicate or conflict with 
rule 206(3)-3T, which presents an alternative means of compliance with 
the procedural requirements of section 206(3) of the Advisers Act that 
relate to principal transactions.
    We note, however, that rule 10b-10 under the Exchange Act is a 
separate confirmation rule that requires broker-dealers to provide 
certain information to their customers regarding the transactions they 
effect, including whether the broker or dealer is acting as an agent or 
as a principal for its own account in a given transaction. Furthermore, 
FINRA rule 2232 requires broker-dealers that are members of FINRA to 
deliver a written notification in conformity with rule 10b-10 under the 
Exchange Act containing certain information. Rule G-15 of the Municipal 
Securities Rulemaking Board also contains a separate confirmation rule 
that governs transactions in municipal securities, and requires 
brokers, dealers and municipal securities dealers to disclose, among 
other things, the capacity in which the firm effected a transaction 
(i.e., as an agent or principal). In addition, investment advisers that 
are qualified custodians for purposes of rule 206(4)-2 under the 
Advisers Act and that maintain custody of their advisory clients' 
assets must send quarterly account statements to their clients pursuant 
to rule 206(4)-2(a)(3) under the Advisers Act.
    These rules overlap with certain elements of rule 206(3)-3T, but we 
designed the temporary rule to work efficiently together with existing 
rules by permitting firms to incorporate the required disclosure into 
one confirmation statement.

F. Significant Alternatives

    The Regulatory Flexibility Act directs us to consider significant 
alternatives that would accomplish our stated objective, while 
minimizing any significant adverse impact on small entities.\48\ 
Alternatives in this category would include: (i) Establishing different 
compliance or reporting standards or timetables that take into account 
the resources available to small entities; (ii) clarifying, 
consolidating, or simplifying compliance requirements under the rule 
for small entities; (iii) using performance rather than design 
standards; and (iv) exempting small entities from coverage of the rule, 
or any part of the rule.
---------------------------------------------------------------------------

    \48\ See 5 U.S.C. 603(c).
---------------------------------------------------------------------------

    We believe that special compliance or reporting requirements or 
timetables for small entities, or an exemption from coverage for small 
entities, may create the risk that the investors who are advised by and 
effect securities transactions through such small entities would not 
receive adequate disclosure. Moreover, different disclosure 
requirements could create investor confusion if it creates the 
impression that small investment advisers have different conflicts of 
interest with their advisory clients in connection with principal 
trading than larger investment advisers. We believe, therefore, that it 
is important for the disclosure protections required by the rule to be 
provided to advisory clients by all advisers, not just those that are 
not considered small entities. Further consolidation or simplification 
of the proposals for investment advisers that are small entities would 
be inconsistent with the Commission's goals of fostering investor 
protection.
    We have endeavored through rule 206(3)-3T to minimize the 
regulatory burden on all investment advisers eligible to rely on the 
rule, including small entities, while meeting our regulatory 
objectives. It was our goal to ensure that eligible small entities may 
benefit from the Commission's approach to the rule to the same degree 
as other eligible advisers. The condition that advisers seeking to rely 
on the rule must also be registered with us as broker-dealers and that 
each account with respect to which an adviser seeks to rely on the rule 
must be a brokerage account subject to the Exchange Act, and the rules 
thereunder, and the rules of the self-regulatory organization(s) of 
which the broker-dealer is a member, reflect what we believe is an 
important element of our balancing between easing regulatory burdens 
(by affording advisers an alternative means of compliance with section 
206(3) of the Act) and meeting our investor protection objectives.\49\ 
Finally, we do not consider using performance rather than design 
standards to be consistent with our statutory mandate of investor 
protection in the present context.
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    \49\ See 2007 Principal Trade Rule Release, Section II.B.7 
(noting commenters that objected to this condition as disadvantaging 
small broker-dealers (or affiliated but separate investment advisers 
and broker-dealers)).
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G. Solicitation of Comments

    We solicit written comments regarding our analysis. We request 
comment on whether the rule will have any effects that we have not 
discussed. We request that commenters describe the nature of any impact 
on small entities and provide empirical data to support the extent of 
the impact.
    Do small investment advisers believe an alternative means of 
compliance with section 206(3) should be available to them?

VII. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of

[[Page 48716]]

1996, or ``SBREFA,'' \50\ we must advise OMB whether a proposed 
regulation constitutes a ``major'' rule. Under SBREFA, a rule is 
considered ``major'' where, if adopted, it results in or is likely to 
result in: (1) An annual effect on the economy of $100 million or more; 
(2) a major increase in costs or prices for consumers or individual 
industries; or (3) significant adverse effects on competition, 
investment or innovation.
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    \50\ Public Law 104-121, Title II, 110 Stat. 857 (1996) 
(codified in various sections of 5 U.S.C., 15 U.S.C. and as a note 
to 5 U.S.C. 601).
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    We request comment on the potential impact of the proposed 
amendment on the economy on an annual basis. Commenters are requested 
to provide empirical data and other factual support for their views to 
the extent possible.

VIII. Statutory Authority

    The Commission is proposing to amend rule 206(3)-3T pursuant to 
sections 206A and 211(a) of the Advisers Act [15 U.S.C. 80b-6a and 80b-
11(a)].

List of Subjects in 17 CFR Part 275

    Investment advisers, Reporting and recordkeeping requirements.

Text of Proposed Rule Amendment

    For the reasons set out in the preamble, Title 17, Chapter II of 
the Code of Federal Regulations is proposed to be amended as follows.

PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940

0
1. The authority citation for part 275 continues to read in part as 
follows:

    Authority:  15 U.S.C. 80b-2(a)(11)(G), 80b-2(a)(11)(H), 80b-
2(a)(17), 80b-3, 80b-4, 80b-4a, 80b-6(4), 80b-6a, and 80b-11, unless 
otherwise noted.
* * * * *


Sec.  275.206(3)-3T  [Amended]

0
2. In Sec.  275.206(3)-3T, amend paragraph (d) by removing the words 
``December 31, 2014'' and adding in their place ``December 31, 2016''.

    By the Commission.

    Dated: August 12, 2014.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-19421 Filed 8-15-14; 8:45 am]
BILLING CODE 8011-01-P