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September 21, 2007 at 08:00 PM
The SEC announced September 20 a temporary rule regarding principal trades with investment advisory accounts, Section 206(3) of the Advisers Act, which is intended to make October 1 compliance with the rollback of the broker/dealer exemption rule easier to accomplish. The original rule, also known as the Merrill Lynch rule, which exempted brokers from regulation as an investment advisor even when they were being paid fees for investment advice in fee-based brokerage accounts, was vacated last spring by the U.S. Court of Appeals for the D.C. circuit after a challenge by the Financial Planning Association (FPA).
Temporary Rule 206(3)-3T, due to expire December 31, 2009, applies to non-discretionary advisory accounts. To comply, advisors will have to disclose in writing any conflicts regarding the principal trades; get prior, written, revocable permission from clients to do principal transactions; disclose and get oral or written consent before each trade; disclose by confirmation whether the advisor has acted as principal and confirming that the client gave permission for that; and provide each client with an annual, itemized report on principal transactions with that client. The investment advisor must be dually registered as a broker/dealer.
The SEC wrote in its announcement that the temporary rule “will not relieve an investment adviser from its fiduciary obligations imposed by the Advisers Act or by other applicable provisions of federal law. These obligations include fulfilling the duty to seek best execution of client transactions, as well as the duty to disclose material facts necessary to alert clients to the adviser’s potential conflicts of interest.”
