The SEC Office of Compliance Inspections and Examinations ("OCIE") urged investment advisers to review written policies and procedures so as to maintain compliance with the restrictions and prohibitions on principal trading and agency cross transactions involving advisory clients.

In a risk alert, OCIE recommended that investment advisers review the disclosure and consent provisions under Section 206(3)(Prohibited transactions) of the Investment Advisers Act, in addition to Sections 206(1) and (2), to ensure that clients are made aware of potential conflicts of interest in a principal trade or agency cross transaction.

According to OCIE, common compliance deficiencies include the failure to:

  • provide written disclosures to clients or obtain required client consent;

  • meet the requirements of Section 206(3) even after an investment adviser recognized it had engaged in principal trades with a client;

  • receive client consent to a principal trade before executing a transaction;

  • obtain effective consent from an advised pooled investment vehicle in which the adviser and affiliates have a greater than 25% interest (in which case, any trades by the vehicle are deemed to be made by the adviser as principal for purposes of Section 206) before the investment adviser conducts principal trades between the vehicle and other advisory clients; and

  • produce evidence of compliance with the written consent, confirmation or disclosure requirements of the Advisers Act.


Dorothy Mehta

This OCIE alert is important for all registered investment advisers ("RIAs") - the consequences of non-compliance are too high not only from a regulatory standpoint, but also with client relations. RIAs should review trades to determine if transactions are principal trades or cross trades and should review their processes to confirm that they are consistent with disclosures in offering documents and compliance manuals, and are sufficiently robust to pass regulatory scrutiny.

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.