United States: OCIE Notifies Investment Advisers Of Principal And Agency Cross Trading Compliance Deficiencies

Last Updated: October 7 2019
Article by Kevin P. Scanlan

Failures by a number of investment advisers to comply with certain rules governing principal and agency cross trades has prompted the compliance inspections staff of the Securities and Exchange Commission (SEC) to issue a risk alert. This alert, among other things, emphasizes the need for investment advisers to have adequate policies and procedures in place related to principal and agency cross trading to meet their compliance obligations as well as their fiduciary duties to their clients.

On Sept. 4, 2019, the SEC’s Office of Compliance Inspections and Examinations (OCIE) posted a risk alert describing frequent compliance issues related to principal trading and agency cross transactions, which it identified in connection with recent examinations of investment advisers.

OCIE reviewed compliance issues related to Section 206(3) of the Investment Advisers Act of 1940 (Advisers Act), which prohibits an investment adviser, acting as principal for his own account, from selling or purchasing securities (principal trades) without disclosing the capacity in which the adviser is acting and obtaining the consent of the client prior to the completion of such principal trade. Section 206(3) also prohibits agency cross transactions (i.e., transactions where an adviser is acting as a broker for a person other than the particular advisory client and effects a purchase or sale of a security for the account of such advisory client) unless adequate disclosure is provided to a client and consent from such client is secured to such transaction. 

OCIE noted several recurring compliance issues among investment advisers engaged in principal trades and agency cross trades. The issues cited most often were:

  • Advisers acting as principal for their own accounts had purchased securities from, or sold securities to, advisory clients without making the required written disclosures to clients or obtaining the necessary client consents.
  • Other advisers recognized that they engaged in principal trades with a client, but still didn’t meet all of the requirements of Section 206(3) because, for example, they failed to secure prior client consent on a transaction-by-transaction basis and failed to provide sufficient disclosure regarding the terms of such transaction and the potential conflicts of interest associated with such transaction.

Additionally, OCIE detected deficiencies among advisers engaged in principal trades involving pooled investment vehicle clients. For example, OCIE observed that:

  • Advisers made trades between advisory clients and an affiliated pooled investment vehicle while failing to recognize the adviser’s significant ownership interests in the investment vehicle caused the transaction to be a principal transaction. In this regard, the risk alert confirms prior guidance issued by the SEC staff indicating that the Section 206(3) principal trade obligations do not apply to a transaction between a client account and a pooled investment vehicle of which the investment adviser and/or its controlling persons, in the aggregate, own 25% or less.
  • Some advisers effected principal trades between themselves and pooled investment vehicle clients without obtaining effective consent from the pooled investment vehicle prior to completing the transactions.

In respect of compliance issues associated with agency cross transactions, OCIE noted that:

  • Some advisers engaged in such transactions without disclosure to clients.
  • Other advisers engaged in agency cross transactions in purported compliance with Section 206(3) and Rule 206(3)-2, but were unable to produce any documentation evidencing compliance with the written consent, confirmation or disclosure requirements of the rule.

According to OCIE, the compliance issues summarized above might be attributed to a lack of communication and accountability among investment advisers regarding policies and procedures. OCIE discovered some advisers didn’t have policies and procedures relating to Section 206(3), even though they engaged in principal trades and agency cross transactions. The SEC staff also noted some advisers had established policies and procedures but failed to follow them.

OCIE set forth these issues in deficiency letters provided to advisers, recommending that they modify their written policies, procedures and practices to ensure compliance with the principal trading and agency cross transaction provisions of the Advisers Act. Further, advisers were prompted to review their implementation of those policies and procedures.

The alert also notes that simply complying with the disclosure and consent provisions of Section 206(3) alone may not satisfy an adviser’s obligations — to ensure that a client’s consent to a principal trade or agency cross transaction is informed, the SEC recommends that Section 206(3) should be read together with Advisers Act Sections 206(1) and (2). Those sections speak to the duty of an adviser “to provide full and fair disclosure to its clients of all material facts relating to the advisory relationship” and “to seek best execution of a client’s transactions where the adviser has the responsibility to select broker-dealers to execute client trades (typically in the case of discretionary accounts).”

If you are an investment adviser, some questions you should consider are:

  1. Do you have policies in place related to client communication and consent that conform to Sections 206(1), (2) and (3) of the Advisers Act?
  2. Have you communicated with your clients with respect to principal and cross trading transactions?
  3. Have you received the appropriate client consents, where needed, and are these consents readily available?

If you have specific questions about these or other compliance matters, you should consult with a qualified legal adviser regarding the most effective and efficient way to remain compliant.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions