Preliminary Recommendation Regarding Certain Principal Transactions with Advisory 

Clients Seeking to Liquidate Bond Positions

The Municipal Securities Transparency Subcommittee (“Subcommittee”) of the Fixed 

Income Market Structure Advisory Committee (“FIMSAC”) was formed to consider the 

impact of transparency, both pre-trade and post-trade, on the municipal securities markets. 

As a result of such consideration, this Subcommittee determines whether to make policy 

recommendations to enhance the liquidity, transparency and efficiency of the municipal bond 

markets. Further, a mandate of FIMSAC is to consider policy recommendations to improve 

execution, access, and transparency of fixed-income markets with a specific emphasis on the 

retail investor. 

One area of focus of the Subcommittee has been on direct interactions where retail customers 

buy and sell individual bonds through their investment advisers or broker-dealers. In a 

traditional brokerage account, broker-dealers are required to provide a fair and reasonable 

price to their customer and meet best execution requirements. Mostly, broker-dealers with a 

customer looking to sell a bond will solicit bids from other market participants (dealers) and

quite often may be willing to commit their own capital by providing a bid for the brokerdealers own account. In contrast, for advisory accounts held by broker-dealers that are also 

registered with the Securities and Exchange Commission (“SEC”) as investment advisers, 

broker-dealers are not permitted to enter a bid for the broker-dealer’s own account for their 

client wishing to sell a bond, without complying with the disclosure and consent 

requirements of the Investment Advisers Act of 1940 (“Advisers Act”). This could cause a 

client in an advisory account to receive a less favorable price, especially during volatile 

markets. To address this, the subcommittee would like to recommend alternative means for 

investment advisers that are registered with the SEC as broker-dealers to meet the 

requirements of section 206(3) of the Advisers Act when they act in a principal capacity in

one type of transaction with their advisory clients.

As background, section 206(3) of the Advisers Act makes it unlawful for any investment 

adviser, directly or indirectly, “acting as principal for his/her own account, knowingly to sell 

any security to or purchase any security from a client, without disclosing to such client in 

writing before the completion of such transaction the capacity in which he/she is acting and 

obtaining the consent of the client to such transaction.” The disclosure and consent is 

required on a transaction-by-transaction basis. In 2007, the SEC adopted temporary rule 

206(3)-3T on an interim final basis. The purpose of the rule was to permit broker-dealers to 

sell their non-discretionary advisory clients certain securities on a principal basis that might 

not be available on an agency basis, or might be available on an agency basis only on less 

favorable terms, while protecting clients from conflicts of interest as a result of such 

transactions. The rule was originally intended to sunset in 2009, but was extended several 

times as the effects were evaluated and industry and other commentary was collected. Rule 

206(3)-3T was allowed to sunset in 2016. The SEC requested quantitative data and 

economic analyses, relating to the benefits and costs that could result from alternative 

approaches regarding the standards of conduct and other obligations of broker-dealers and 

investment advisers, including associated with rule 206(3)-3T; however, out of over 200 

comment letters received by the SEC staff, none contained such analysis regarding rule 
206(3)-3T. This could reasonably lead one to the conclusion that these data are difficult to 

accumulate or that the statistical analysis of available data leads to ambiguous empirical 

conclusions. In the Subcommittee’s view, FIMSAC and the SEC, in considering these 

recommendations, should not assume that the lack of quantitative analysis indicates that the 

costs outweigh the benefits; rather the Subcommittee believes that the lack of data more 

likely reflects difficulty in obtaining the data. It is the Subcommittee’s belief that the 

benefits in terms of additional liquidity and the presence of auditable outputs would far 

outweigh the cost of the implementation of the recommended rule.

As such, the Subcommittee proposes alternative requirements for principal transactions

involving the liquidation of bonds within the client portfolio. Of course, it is important to 

insure that the conditions and restrictions for these alternatives be followed by broker-dealers 

wishing to take advantage of the alternatives.

1) There is a regulatory framework which exists today requiring broker-dealers to comply 

with best-execution requirements. The typical process for the liquidation of client bond 

positions involves very broad distribution among broker-dealers using various venues 

including but not limited to Alternative Trading Systems (“ATS”), which provides a full 

audit trail of activity, or through municipal brokers’ broker or other bid-wanted venues

which also have record keeping requirements. If the liquidating account is 

commissionable, then the order-handling broker-dealer can also contribute a bid. In 

advisory accounts, the broker-dealer is required to sell the bonds to the highest bid away. 

This is true even if the order-handling dealer would bid a higher price. We believe that 

the client could receive better execution, without undermining the process, if a brokerdealer handling such an order could submit a “blind” bid (i.e., without having access to 

the bids from other dealers and requiring the dealer who initiates the auction submitting 

their best price to that auction at that time) for advisory clients via a bid-wanted venue. 

Recommendation: The Subcommittee recommends that the SEC consider a rule that 

permits a broker-dealer to meet the requirements of section 206(3) of the Advisers Act when 

acting in a principal capacity to sell certain client bond positions within the normal 

liquidation process, by allowing dealers to submit a “blind bid” on a principal basis against 

its advisory clients.