SEC seeks to delay principal trading rule for two years

Regulator says issue should be considered within broader fiduciary-duty decisions

Aug 13, 2014 @ 12:41 pm

By Mark Schoeff Jr.

The Securities and Exchange Commission is seeking to extend for the third time in four years a temporary rule that makes it easier for investment advisers who are dually registered as brokers to sell from their firms' proprietary accounts.

On Tuesday, the SEC released for comment a proposal that would allow the interim rule to be in effect until Dec. 31, 2016, instead of expiring at the end of this year. The comment deadline will be 30 days after the regulatory notice is published in the Federal Register.

The temporary rule allows dually registered advisers to obtain consent for so-called principal trades (where a broker-dealer uses its own pool of securities in the transaction) verbally on a transaction-by-transaction basis or to provide written prospective disclosure and authorization followed by annual reports to the clients.

Under the Investment Advisers Act of 1940, investment advisers must obtain written disclosure and consent before every principal trade. The provision is meant to address potential conflicts of interest that could occur when a firm trades from its proprietary account.

The SEC wants to continue the temporary principal trading rule while the agency mulls whether to propose a separate rule to raise investment advice standards for brokers.

The Dodd-Frank financial reform law gave the SEC the authority to promulgate a regulation requiring anyone providing retail investment advice to act in the best interest of their clients. Advisers must currently meet that kind of fiduciary-duty standard, while brokers are subject to a suitability rule that allows them to sell high-priced investment products as long as they meet their clients' needs.

The SEC has not yet decided whether to propose a fiduciary-duty rule, which could address principal trading, among many other regulations governing advisers and brokers.

“We are proposing this extension because we continue to believe that the issues raised by principal trading, including restrictions in … the Advisers Act and our experiences with, and observations regarding, the operation of the [interim principal trading] rule, should be considered as part of our broader consideration of the regulatory requirements applicable to brokers-dealers and investment advisers in connection with the Dodd-Frank Act,” the extension proposal states.

One fiduciary-duty advocate is frustrated by the delays surrounding principal trading regulations. Duane Thompson, senior policy adviser for Fi360, a fiduciary-duty training company, said the area is “rife for conflicts of interest.”

“It points to the larger problem of resolving the issue over whether or not brokers should be subject to a fiduciary standard,” Mr. Thompson said. “Unfortunately, we see the same temporary rule every year becoming more and more permanent.”

The SEC said firms are complying with the interim rule and that imposing transaction-by-transaction disclosure and consent “could limit the access of non-discretionary advisory clients of advisory firms that are registered with us as broker-dealers to certain securities.”

The interim principal trading rule was released in 2007 to allow brokers to sell securities in proprietary accounts to advisory clients, following a court case that found that fee-based brokerage accounts are subject to rules governing investment advisers.

The extension proposal says that 290 of the approximately 11,000 SEC-registered investment advisers are also registered as brokers that have non-discretionary accounts. Of those, 97 indicate on their ADV that they engage in principal trading.


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