Preliminary Recommendations Regarding Certain Principal Transactions with Advisory 

Clients

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 broker-dealers 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 brokerdealers to meet the requirements of section 206(3) of the Advisers Act when they act in a 

principal capacity in two types of transactions with their advisory clients.

Another area of interest to the sub-committee is the ability of a dealer to offer and sell negotiated 

new issue municipal bonds during the order period that the dealer participates in as a syndicate 

manager, co-manager or selling group member. Currently, a dealer cannot offer/sell negotiated 

new issue bonds to an advisory client without meeting the disclosure and consent requirements 

of the Advisers Act. This could cause a client to not have access to new issue bonds that meet 

their investment criteria or only have access to the bonds in the secondary market at potentially 

higher prices.

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-bytransaction 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 two types of principal 

transactions: (1) the purchase of negotiated new-issue municipal bonds and (2) 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) Currently, a broker/dealer that negotiates and underwrites a new-issue municipal bond or is a 

co-manager or is a member of the selling group, is unable to sell bonds in the offering to its 

advisory clients without meeting the disclosure and consent requirements of the Advisers 

Act. The result of this is that few (or none) of the underwriting dealer’s advisory clients buy 

bonds in the initial offering of negotiated municipal bonds for which the dealer is a syndicate 

manager or selling group member. Advisory clients that wish to buy these bonds will buy 

them after the deal is closed and the bonds are free to trade – typically at a price higher than 

the original offer price. 

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

broker-dealer that negotiates and underwrites a new-issue municipal bond or is a co-manager or 

member of the selling group to meet the requirements of section 206(3) of the Advisers Act 

when acting in a principal capacity to sell new-issue municipal bonds during the negotiated order 

period.

2) 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 orderhandling 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 broker-dealer 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.