SEC extends 'temporary' trading rule for another two years

Brokers allowed to trade as principals in certain accounts

Dec 28, 2012 @ 1:43 pm

By Dan Jamieson

The Securities and Exchange Commission has extended for two years a controversial rule that lets brokers trade as principals in non-discretionary advisory accounts.

The temporary rule, which was set to expire on Dec. 31, will be extended until the end of 2014.

Originally adopted in 2007, the rule was intended to allow principal trading in an estimated 1 million non-discretionary advisory accounts that had earlier been converted from fee-based brokerage accounts.

That conversion occurred after a federal appeals court threw out the SEC's so-called Merrill Lynch Rule, which exempted fee-based brokerage accounts from falling under the Investment Advisers Act of 1940. The Advisers Act generally prohibits principal trading in advisory accounts.

The brokerage industry and fiduciary advocates have been battling ever since over the trading rule, which has already been extended twice.

In comment letters last month, the Securities Industry and Financial Markets Association and the Financial Services Institute Inc. argued for a five-year extension. The brokerage trade groups said the SEC needs to first act on its regulatory revamp of advisers and brokers under Section 913 of the Dodd-Frank law.

In contrast, fi360 Inc., the fiduciary training firm, said the SEC should limit the extension to six months. It faulted the agency for not having data on how many firms use the exemption, how many compliance problems arise from principal trading, and the potential costs to investors from principal trades.

SIFMA countered that a survey of seven dual-registrant firms showed that in the aggregate, 106,682 accounts were using the exemption, averaging more than 12,000 principal trades per month.

SIFMA also said that ADV data showed that a total of 10 firms engage in principal trading with advisory clients, and that these firms had 3.5 million non-discretionary accounts, some of which might be engaged in principal trading.

In its order extending the rule, the SEC said it agreed that the trading exemption “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.”

The agency added that its staff “has and will continue to examine firms that engage in principal transactions and will take appropriate action to help ensure that firms are complying with [the rule], including possible enforcement action.”

The SEC approved the extension last week, with an effective date of today.

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