Alert October 16, 2012

SEC Proposes to Extend Sunset of Temporary Rule Regarding Certain Principal Transactions for Advisers Until December 31, 2014

The SEC issued a release proposing to extend until December 31, 2014 (from December 31, 2012) the date on which Rule 206(3)-3T under the Investment Advisers Act of 1940 (the “Advisers Act”) will sunset.  Rule 206(3)-3T was adopted as a temporary rule in 2007 following a decision by the Court of Appeals for the District of Columbia Circuit that struck down an SEC rule addressing the application of the Advisers Act to certain activities of broker-dealers (see the April 10, 2007 Financial Services Alert for a discussion of this decision).  The Rule is designed to enable a dually registered broker-dealer’s nondiscretionary customers that have converted their current fee-based brokerage accounts to fee-based advisory accounts to have continued access to securities available on a principal basis from the firm without requiring the firm to comply with the strict terms of Section 206(3)’s disclosure and consent requirements. The SEC staff has posted a Small Entity Compliance Guide that summarizes and explains the Rule. 

The release states that the SEC is seeking the extension because it continues to believe that the issues raised by principal trading, including the restrictions in Section 206(3) of the Advisers Act and the SEC’s experiences with, and observations regarding, the operation of Rule 206(3)-3T, should be part of a broader consideration of the regulatory requirements applicable to broker-dealers and investment advisers in connection with the Dodd-Frank Act.