The Office of Compliance Inspections and Examinations ("OCIE") released a Risk Alert1 identifying the most common compliance issues, as identified by examinations of investment advisers, related to principal and agency cross transactions under Section 206(3) of the Investment Advisers Act of 1940 (the "Advisers Act"). Section 206(3) makes it unlawful, with certain limited exceptions, for an investment adviser to directly sell or purchase securities to and from clients or to act as a broker for a third party effecting the sale or purchase of securities, without satisfying certain disclosure and consent requirements.2 Issuers of structured investments often seek to have these investments distributed through affiliated private wealth channels and, in that context, should consider the most common compliance issues observed by OCIE staff.
Failing to follow the specific requirements of Section 206(3) was one of the most common compliance issues identified. Examples included failure to recognize that Section 206(3) applies, failure to obtain client consent before each individual trade and insufficient disclosure regarding potential conflicts of interest and transaction terms.
Compliance issues frequently arose in relation to agency cross transactions, both because advisers disclosed that they would not engage in agency cross transactions, and then did so, and because advisers effected agency cross transactions purporting to rely on Rule 206(3)-2 but did not follow the specific requirements related to the rule.
Finally, many advisers did not have policies and procedures in place relating to Section 206(3), and among those that did establish such policies, many failed to follow them.
The OCIE concluded by encouraging advisers to adopt policies related to Section 206(3) and to review those policies to ensure compliance with the principal trading and agency cross transaction provisions of the Advisers Act.
Originally published in REVERSEinquiries: Volume 2, Issue
9.
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Footnote
2 While it is necessary for an adviser to comply with Section 206(3), compliance with Section 206(3) is not necessarily sufficient to satisfy an adviser's fiduciary obligations.
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