SECURITIES AND EXCHANGE COMMISSION 

17 CFR Part 275 

[Release No. IA-2965; File No. S7-23-07] 

RIN 3235-AJ96 

Temporary Rule Regarding Principal Trades with Certain Advisory Clients 

AGENCY: Securities and Exchange Commission. 

ACTION: Final rule. 

SUMMARY: The Securities and Exchange Commission is adopting as final Rule 

206(3)-3T under the Investment Advisers Act of 1940, the interim final temporary rule 

that establishes an alternative means for investment advisers who are registered with the 

Commission as broker-dealers to meet the requirements of Section 206(3) of the 

Investment Advisers Act when they act in a principal capacity in transactions with certain 

of their advisory clients. As adopted, the only change to the rule is the expiration date. 

Rule 206(3)-3T will sunset on December 31, 2010. 

DATES: Effective Date: December 30, 2009, except 17 CFR 275.206(3)-3T will expire

and no longer be effective on December 31, 2010. 

FOR FURTHER INFORMATION CONTACT: Sarah A. Bessin, Assistant Director, 

Daniel S. Kahl, Branch Chief, or Matthew N. Goldin, Senior Counsel, at (202) 551-6787 

or IArules@sec.gov, Office of Investment Adviser Regulation, Division of Investment 

Management, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 

20549-5041. 
 

 

 

 

 

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SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission is 

adopting as final temporary Rule 206(3)-3T [17 CFR 275.206(3)-3T] under the 

Investment Advisers Act of 1940 [15 U.S.C. 80b]. 

I. BACKGROUND 

On September 24, 2007, we adopted, on an interim final basis, Rule 206(3)-3T, a 

temporary rule under the Investment Advisers Act of 1940 (the “Advisers Act”) that 

provides an alternative means for investment advisers who are registered with us as 

broker-dealers to meet the requirements of Section 206(3) of the Advisers Act when they 

act in a principal capacity in transactions with certain of their advisory clients.1 The 

purpose of the rule was to permit broker-dealers to sell to their advisory clients, in the 

wake of Financial Planning Association v. SEC (the “FPA Decision”),2 certain securities 

held in the proprietary accounts of their firms that might not be available on an agency 

basis – or might be available on an agency basis only on less attractive terms3 – while 

protecting clients from conflicts of interest as a result of such transactions.4 

1	 Rule 206(3)-3T [17 CFR 275.206(3)-3T]. All references to Rule 206(3)-3T and the 

various sections thereof in this Release are to 17 CFR 275.206(3)-3T and its 

corresponding sections. See also Temporary Rule Regarding Principal Trades with 

Certain Advisory Clients, Investment Advisers Act Release No. 2653 (Sep. 24, 2007) [72 

FR 55022 (Sep. 28, 2007)] (“2007 Principal Trade Rule Release”). 

2	 482 F.3d 481 (D.C. Cir. 2007). In the FPA Decision, handed down on March 30, 2007, 

the Court of Appeals for the District of Columbia Circuit vacated (subject to a subsequent 

stay until October 1, 2007) Rule 202(a)(11)-1 under the Advisers Act. Rule 202(a)(11)-1 

provided, among other things, that fee-based brokerage accounts were not advisory 

accounts and were thus not subject to the Advisers Act. For further discussion of feebased brokerage accounts, see 2007 Principal Trade Rule Release, Section I. 

3	 See 2007 Principal Trade Rule Release at nn.19-20 and Section VI.C. 

4	 As a consequence of the FPA Decision, broker-dealers offering fee-based brokerage 

accounts became subject to the Advisers Act with respect to those accounts, and the 

client relationship became fully subject to the Advisers Act. These broker-dealers – to 

the extent they wanted to continue to offer fee-based accounts and met the requirements 

for registration – had to register as investment advisers, if they had not done so already, 

act as fiduciaries with respect to those clients, disclose all material conflicts of interest, 
 

 

 

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The rule vacated in the FPA Decision had allowed broker-dealers to offer feebased accounts without complying with the Advisers Act, including the requirements of 

Section 206(3). Section 206(3) makes is unlawful for any investment adviser, directly or 

indirectly, “acting as a principal for his own account, knowingly to sell any security to or 

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

before the completion of such transaction the capacity in which he is acting and obtaining 

the consent of the client to such transaction.”5 Prior to our adoption of Rule 206(3)-3T, 

several firms that had offered fee-based brokerage accounts informed our staff that the 

written disclosure and the client consent requirements of Section 206(3) act as an 

operational barrier to their ability to engage in principal trades with their clients. Most 

informed us that they planned to discontinue fee-based brokerage accounts as a result of 

the FPA decision. They explained that they planned to do so because of the application 

of the Advisers Act and that, unless they were provided an exemption from (or an 

alternative means of complying with) Section 206(3), they would be unable to provide 

the same range of services to those fee-based brokerage customers who elected to 

become advisory clients and would expect few to elect to do so. 

Rule 206(3)-3T was designed to continue to provide the protection of transactionby-transaction disclosure and consent6

 to advisory clients when investment advisers seek 

and otherwise fully comply with the Advisers Act, including the restrictions on principal 

trading contained in Section 206(3) of the Act. See 2007 Principal Trade Rule Release, 

Section I. 

5	 15 U.S.C. 80b-6(3) (emphasis added). See also 2007 Principal Trade Rule Release, 

Section II.A. 

6	 Rule 206(3)-3T(a)(4). See also 2007 Principal Trade Rule Release, Section II.B.4. 
 

 

 

 

 

 

 

 

 

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to trade with them on a principal basis, subject to several conditions. 7 Specifically, Rule 

206(3)-3(T) permits an adviser, with respect to non-discretionary advisory accounts,8

 to 

comply with Section 206(3) of the Advisers Act by, among other things, meeting the 

following conditions: 

(i)	 providing written, prospective disclosure regarding the conflicts arising 

from principal trades;9 

(ii)	 obtaining written, revocable consent from the client prospectively 

authorizing the adviser to enter into principal transactions;10 

(iii)	 making certain disclosures, either orally or in writing, and obtaining the 

client’s consent before each principal transaction;11 

(iv)	 sending to the client confirmation statements disclosing the capacity in 

which the adviser has acted and disclosing that the adviser informed the 

client that it may act in a principal capacity and that the client authorized 

the transaction;12 and 

7	 For a discussion of Section 206(3) of the Advisers Act, its legislative history and our past 

interpretations of it, see the 2007 Principal Trade Rule Release, Section II.A. 

8	 For purposes of the rule, the term “investment discretion” has the same meaning as in 

Section 3(a)(35) of the Exchange Act [15 U.S.C. 78c(a)(35)], except that it excludes 

investment discretion granted by a customer on a temporary or limited basis. Rule 

206(3)-3T(a)(1). See also 2007 Principal Trade Rule Release at n. 31. 

9	 Rule 206(3)-3T(a)(3). See also 2007 Principal Trade Rule Release, Section II.B.3. 

10	 Rule 206(3)-3T(a)(3). Rule 206(3)-3T also requires an adviser seeking to rely on the rule 

to include with each written disclosure required by the rule a conspicuous, plain English 

statement that the client may revoke the prospective, written consent without penalty at 

any time by written notice to the investment adviser. Rule 206(3)-3T(a)(8). See also 

2007 Principal Trade Rule Release, Section II.B.3. 

11	 Rule 206(3)-3T(a)(4). See also 2007 Principal Trade Rule Release, Section II.B.4. 

12	 Rule 206(3)-3T(a)(5). See also 2007 Principal Trade Rule Release, Section II.B.5. 
 

 

 

 

 

 

 

 

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(v)	 delivering to the client an annual report itemizing the principal 

transactions made during the year.13 

The rule also requires that the investment adviser be registered as a broker-dealer 

under Section 15 of the Securities Exchange Act of 1934 (the “Exchange Act”) [15 

U.S.C. 78o] and that each account for which the adviser relies on the rule be a brokerage 

account subject to the Exchange Act, and the rules thereunder, and the rules of the selfregulatory organization(s) (“SRO”) of which it is a member.14 The rule is not available 

for principal trades of securities if the investment adviser or a person who controls, is 

controlled by, or is under common control with the adviser (“control person”) is the 

issuer or is an underwriter of the security.15 The rule includes one exception – an adviser 

may rely on the rule for trades in which the adviser or a control person is an underwriter 

of non-convertible investment-grade debt securities.16 Rule 206(3)-3T(b) clarifies that 

the rule does not relieve in any way an investment adviser from its obligation to act in the 

best interests of each of its advisory clients, including fulfilling the duty with respect to 

the best price and execution for a particular transaction for the advisory client.17 Rule 

206(3)-3T was set to expire on December 31, 2009, approximately 27 months after its 

adoption.18 

II. DISCUSSION 

13 Rule 206(3)-3T(a)(6). See also 2007 Principal Trade Rule Release, Section II.B.6. 

14 Rule 206(3)-3T(a)(7). See also 2007 Principal Trade Rule Release, Section II.B.7. 

15 Rule 206(3)-3T(a)(2). See also 2007 Principal Trade Rule Release, Section II.B.2. 

16 Rule 206(3)-3T(a)(2). See also 2007 Principal Trade Rule Release, Section II.B.2. A 

separate Commission rulemaking may have an impact on the rule’s definition of “nonconvertible investment grade debt securities.” See note 34 below. 

17	 Rule 206(3)-3T(b). See also 2007 Principal Trade Rule Release, Section II.B.8. 

18	 Rule 206(3)-3T(d). See also 2007 Principal Trade Rule Release, Section II.B.9. 
 

 

 

 

 

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We are adopting Rule 206(3)-3T in the same form in which we adopted it on an 

interim final basis in 2007, except that the sunset period of the rule will end one year later 

(on December 31, 2010). Absent further action by the Commission, Rule 206(3)-3T will 

expire on December 31, 2010. As we continue to assess the operation of the rule along 

with intervening developments, we believe that the substantive provisions of Rule 

206(3)-3T as it was adopted on an interim final basis provide sufficient protections to 

advisory clients to warrant its continued operation for an additional limited period of 

time. We will use that time to consider whether to propose to continue the rule beyond 

the revised sunset date and, if so, what if any modifications should be made to the rule. 

a. Comments on the Scope and Conditions of the Rule 

We received comment letters from eight commenters on the interim final rule.19 

Several favored narrowing the scope of the exemption provided by the rule or opposed its 

expansion.20 Others, however, urged us to expand the rule’s exemption to cover 

additional securities.21 Some commenters suggested that an adviser be prohibited from 

relying on the rule when trading any securities underwritten or issued by the adviser or 

any of its affiliates (i.e., that we exclude underwritten non-convertible investment grade 

19	 The comment letters are available at www.sec.gov/comments/s7-23-07/s72307.shtml. 

However, one additional comment letter was submitted in connection with our proposed 

Interpretive Rule under the Advisers Act Affecting Broker-Dealers, Investment Advisers 

Act Release No. 2652 (Sep. 24, 2007). International Association of Small Broker 

Dealers and Advisers (Oct. 25, 2007) (“IASBDA Letter.”) The IASBDA Letter 

addresses one particular aspect of the rule, as noted below, and is available at 

www.sec.gov/comments/s7-22-07/s72207-3.pdf. 

20	 See, e.g., Comment Letter of the Financial Planning Association (Nov. 30, 2007) (“FPA 

Letter I”); Comment Letter of the National Association of Personal Financial Advisors 

(Nov. 30, 2007) (“NAPFA Letter”). 

21	 See, e.g., Comment Letter of the Securities Industry and Financial Markets Association 

(Nov. 30, 2007) (“SIFMA Letter I”); Comment Letter of Davis Polk & Wardwell (Dec. 4, 

2007) (“DPW Letter”). 
 

 

 

 

 

 

 

 

 

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debt securities).22 Others asked that we allow advisers, in reliance on the rule, to engage 

in principal trades with clients in various types of securities the adviser or an affiliate 

underwrote that are highly liquid and for which ascertainable prices are readily 

available.23 

Some commenters generally viewed the protections afforded to clients under the 

rule as inadequate,24 while others urged us to modify the rule to make it easier for 

advisers to effect principal transactions with their clients.25 For example, one commenter 

urged us to limit the rule’s relief to principal transactions with sophisticated or wealthy 

investors who are in a position to protect themselves.26 Another suggested the rule 

expressly require firms to develop policies and procedures that are specifically designed 

to detect, deter and prevent disadvantageous principal transactions.27 And others 

suggested that we require that the disclosure supporting the initial client authorization for 

principal trades be in a separately executed, stand-alone document and not permit it to be 

incorporated directly into an account opening agreement.28 Some commenters asserted, 

however, that the disclosure requirements – in particular, requiring transaction-bytransaction disclosures for principal trades with sophisticated investors – were too 

restrictive,29 while others argued that they did not go far enough.30 Some commenters 

22 See, e.g., Comment Letter of Fund Democracy and the Consumer Federation of America 

(Nov. 30, 2007) (“FD/CFA Letter”). 

23 See, e.g., SIFMA Letter I. 

24 See, e.g., NAPFA Letter. 

25 See, e.g., DPW Letter. 

26 FPA Letter I. 

27 FD/CFA Letter. 

28 See, e.g., FD/CFA Letter; NAPFA Letter; FPA Letter I. 
 

 

 

 

 

 

 

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suggested we impose additional disclosures or disclosure-related requirements.31 One 

commenter questioned the rule’s overall focus on disclosure and urged us to consider 

instead requiring affirmative measures designed to prevent principal trading abuses.32 

Commenters who addressed the issue generally agreed with our view that 

principal trades in securities issued or underwritten by an adviser or its control persons 

should not be permitted under the rule.33 However, these commenters expressed differing 

views with respect to the rule’s exception from the general prohibition for trades in which 

the adviser or control person is an underwriter of non-convertible investment grade debt 

securities.34 We also received mixed comments on the rule’s limitation of relief to 

29	 See, e.g., DPW Letter (although supporting the rule, commenting that the Commission 

should provide more relief from the restrictions of Section 206(3) to permit affirmative 

waiver of the transaction-by-transaction disclosure and consent requirements with respect 

to transactions with financially sophisticated investors involving certain “readily 

marketable” securities). 

30	 See, e.g., Comment Letter of the Investment Advisers Association (Nov. 30, 2007) (“IAA 

Letter”) (expressing strong opposition to any expansion of the relief provided in the rule, 

or relaxation of the rule’s conditions, and emphasizing the importance of monitoring the 

rule in practice before making further changes); FPA Letter I (expressing concern about 

the risks attendant to principal trades); NAPFA Letter (arguing that any expansion of the 

scope of the rule would be inappropriate because of the potential risks associated with 

principal trades). 

31	 See, e.g., FD/CFA Letter; FPA Letter I (expressing concern that the transaction-specific 

disclosures required by the rule may not provide investors with enough information 

regarding conflicts of interest and suggested additional disclosures that should be 

required by the rule). 

32	 See note 27 above and accompanying text. 

33	 See, e.g., FD/CFA Letter; FPA Letter I; SIFMA Letter I. 

34	 Compare SIFMA Letter I (arguing that we should expand the exception to underwritten 

preferred stock, convertible debt, and certificates of deposit (among others)) with FPA 

Letter I (specifically urging us not to extend the exception to debt instruments other than 

investment grade municipal debt and corporate debt and expressing concern with price 

transparency of debt instruments, generally) and FD/CFA Letter (arguing that the 

exception should not be further expanded or that it should be eliminated altogether 

because of concerns regarding the price transparency of debt instruments). 

One commenter supporting a broadening of the exception also urged us to modify our 

definition of “investment grade debt security” to require that a qualifying security receive 
 

 

 

 

 

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investment advisers that are registered with the Commission as broker-dealers. Some 

commenters, generally those representing financial institutions that act as both advisers 

and broker-dealers, supported the limitation35 while others opposed it.36 

Several commenters agreed with our decision to limit the rule to nondiscretionary accounts.37 In contrast, one commenter urged us to expand the rule to be 

ratings from only one nationally recognized statistical rating organization (“NRSRO”) 

instead of two. SIFMA Letter I. We are considering more globally, and in a separate 

rulemaking, whether our inclusion of requirements related to credit ratings in our rules 

and forms as an indication of investment grade quality has, in effect, placed an “official 

seal of approval” on ratings and has adversely affected the quality of due diligence and 

investment analysis. See References to Ratings of Nationally Recognized Statistical 

Rating Organizations in Rules Under the Investment Company Act and Investment 

Advisers Act, Investment Company Act Release No. 28327 (Jul. 1, 2008) [73 FR 

40124 (July 11, 2008)]. In conjunction with recently reopening the comment period for 

the proposal with respect to Rule 206(3)-3T, the Commission requested comment on 

whether it should substitute an approach that uses credit ratings as a minimum standard 

along with additional criteria that must be met with regard to evaluating securities. The 

re-opened comment period closed on December 8, 2009. See References to Ratings of 

Nationally Recognized Statistical Rating Organizations, Investment Company Act 

Release No. 28939 (Oct. 5, 2009) [74 FR 52358 (Oct. 9, 2009)]. 

35	 See, e.g., SIFMA Letter I (arguing that the dual registration condition preserves important 

investor protections that were available to former fee-based brokerage customers who 

elected after the FPA Decision to convert their accounts to advisory accounts). 

36	 See, e.g., FPA Letter I (urging us to eliminate the limitation because investors would 

already receive the protections of both the Advisers Act and the Exchange Act whether 

the adviser is itself also registered as a broker-dealer or whether it is simply affiliated 

with a broker-dealer, and further arguing that that the condition may have anticompetitive 

effects, providing an advantage to investment advisers that are also registered as brokerdealers); Comment Letter of the American Bar Association, section of Business Law’s 

Committee on Federal Regulation of Securities (Apr. 18, 2008) (“ABA Committee 

Letter”) (arguing that the substantial regulatory burdens of applying two regulatory 

regimes is not offset by additional investor protection benefits). 

37	 See, e.g., FD/CFA Letter (arguing that discretionary accounts present a “greater risk of 

abuse as a general matter” and expressed appreciation for the protections provided by this 

limitation); IAA Letter; SIFMA Letter I (agreeing that the rule should apply to all nondiscretionary accounts, but specifically noting that the rule should not be further limited 

in application to former fee-based brokerage accounts only); FPA Letter I (supporting the 

limitation as providing a critical investor protection, but arguing that we should consider 

further narrowing the non-discretionary account limitation to include only those accounts 

that were formerly fee-based brokerage accounts). 
 

 

 

 

 

 

 

 

 

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available to all advisory accounts, not just non-discretionary ones.38 One commenter 

urged us to limit the scope of the rule so that advisers may only rely on it when they are 

conducting a principal trade with a “qualified client,” as defined under Rule 205-3 [17 

CFR 275.205-3] under the Advisers Act,39 while another argued that the rule should not 

be restricted to particular clients.40 

b. Comments on Sunset Provision 

Five commenters addressed the duration of Rule 206(3)-3T.41 Three expressed 

support for the temporary duration of the rule, arguing that, in light of the substantial 

risks associated with principal trading facilitated by the rule, a temporary effectiveness 

period would be important for the Commission to assess whether the scope of relief 

provided by the rule is appropriate.42 Two commenters supported making the rule 

permanent at the end of the sunset provision with broadened relief.43 

38	 ABA Committee Letter (arguing that the specific exclusion in the rule for adviserunderwritten securities, together with an adviser’s best execution obligations, provides 

investors with sufficient investor protections and therefore clients in discretionary 

accounts should not be precluded from the benefits of the relief provided by the rule). 

39	 FPA Letter I (further arguing that institutional clients or natural persons who are deemed 

to be “qualified clients” for purposes of Rule 205-3 are better positioned to understand 

the nature of principal transactions and the potential conflicts and, therefore, are better 

able to protect themselves against potential abuses than are other investors). Another 

commenter also expressed general objections to the placing of any principal trades by 

investment advisers. NAPFA Letter. 

40	 SIFMA Letter I (noting that all investors should be able to benefit from the greater 

investment choices, potentially enhanced executions and additional liquidity provided by 

the rule). 

41	 FPA Letter I; Comment Letter of the Financial Planning Association (Sep. 16, 2008) 

(“FPA Letter II”); IAA Letter; SIFMA Letter I; Comment Letter of the Securities 

Industry and Financial Markets Association (Aug. 21, 2009) (“SIFMA Letter II”); DPW 

Letter; NAPFA Letter. 

42	 FPA Letter I; IAA Letter; NAPFA Letter. 

43	 DPW Letter; SIFMA Letter I. 
 

 

 

 

 

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We received two subsequent letters from market participants. The Securities 

Industry and Financial Markets Association (SIFMA) urged us to extend the temporary 

rule for two years in light of pending legislation that could address principal trading by 

investment advisers.44 The Financial Planning Association (FPA) also wrote 

recommending allowing the rule to expire or extending it for no more than an additional 

year while the Commission conducts a study that either substantiates a clear basis for 

adopting a permanent exemption under Section 206(3) or disproves the view of firms that 

it affords unique benefits to the public.45 

c. Limited Extension of Temporary Rule 

When we adopted Rule 206(3)-3(T) on a temporary basis in September 2007, we 

anticipated the two-year period would provide us with adequate time to evaluate the 

operation of the rule in the marketplace and determine, in conjunction with consideration 

of all comments received, whether the rule should be made permanent, modified or 

allowed to expire. At the time we adopted the interim final rule, we explained that we 

would need to take action no later than the end of the original duration of the temporary 

rule if we intended to continue the same or similar relief.46 

We need additional time to understand how, and in what situations, advisers are 

using the rule. Fewer firms than we anticipated at the time we adopted the rule on an 

interim final basis immediately determined to rely on it and those that did were slower 

than expected to implement the rule. We take seriously the investor protection concerns 

raised by commenters. Consequently, we have determined to limit the duration of the 

44 SIFMA Letter II. 

45 FPA Letter II. 

46 See 2007 Principal Trade Rule Release, Section II.B.9. 
 

 

 

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extension to one year while we continue to evaluate the operation of the rule. As our 

staff continues to gather information, we will assess whether the rule is operating, and 

firms are applying it, in a manner consistent with protecting investors. 

Given the limited nature of the extension, we believe that making other changes to 

the temporary rule could cause firms relying on the rule to need to make adjustments to 

their disclosure documents, client agreements, procedures, or systems that, depending on 

whether we determine to propose and adopt a permanent rule in the future, may be 

applicable for only a year. 

Further evaluation will help inform our decision whether to propose to make the 

rule permanent in its current or an amended form or to allow it to expire.47 We will 

consider, among other things, the comments we received on the interim final rule in 

deciding whether to propose a permanent rule or to let the rule expire. If we decide to 

propose a permanent rule, we will also consider the comments we received in 

determining how such a rule might differ from Rule 206(3)-T. 

In addition, there are currently pending before both houses of Congress bills that 

may address, or otherwise have an impact on, principal trading activities by investment 

advisers and broker-dealers, as well as broader issues under the Advisers Act.48 Waiting 

some additional time for Congress to act will permit us to consider the impact that any of 

47	 Subsequent to adopting Rule 206(3)-3T, the study prepared by RAND Corporation was 

completed. See Investor and Industry Perspectives on Investment Advisers and BrokerDealers, http://www.sec.gov/news/press/2008/2008-1_randiabdreport.pdf. The study 

addressed two primary questions: (1) what are the current business practices of brokerdealers and investment advisers; and (2) do investors understand the differences between 

and relationships among broker-dealers and investment advisers? Several of the bills 

currently pending before Congress are designed to harmonize the separate regulatory 

regimes for investment advisers and broker-dealers. 

48	 See, e.g., Investor Protection Act of 2009, H.R. 3817, 111th Cong. (2009); Restoring 

American Financial Stability Act of 2009, S. ____ 111th Cong. (2009). 
 

 

 

 

 

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those proposals, if enacted, will have on such activities prior to taking further action with 

respect to the temporary rule. 

For the reasons discussed in this release, we have determined that it is necessary 

or appropriate in the public interest and consistent with the protection of investors and 

consistent with the purposes fairly intended by the policy and provisions of the Advisers 

Act to adopt Rule 206(3)-T as a final temporary rule. We are adopting Rule 206(3)-3T in 

the same form in which we originally adopted it on an interim final basis, except that it 

will expire on December 31, 2010, one year after its original expiration date. 

III. CERTAIN ADMINISTRATIVE LAW MATTERS 

The amendment to Rule 206(3)-3T is effective on December 30, 2009.

The Administrative Procedure Act generally requires that an agency publish a final rule in 

the Federal Register not less than 30 days before its effective date.49 However, this 

requirement does not apply if the rule is a substantive rule which grants or recognizes an 

exemption or relieves a restriction, or if the rule is interpretive.50 Rule 206(3)-3T in part has 

interpretive aspects and is a rule that recognizes an exemption 

and relives a restriction. 

IV. PAPERWORK REDUCTION ACT 

Rule 206(3)-3T contains “collection of information” requirements within the 

meaning of the Paperwork Reduction Act of 1995.51 The Office of Management and 

Budget (“OMB”) approved the burden estimates presented in the 2007 Principal Trade 

49 5 U.S.C. 553(d). 

50 5 U.S.C. 553(d)(1) and (2). 

51 44 U.S.C. 3501 et seq. 
 

 

 

 

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Rule Release,52 first on an emergency basis and subsequently on a regular basis. OMB 

approved the collection of information with an expiration date of March 31, 2011. An 

agency may not conduct or sponsor, and a person is not required to respond to, a 

collection of information unless it displays a currently valid OMB control number. The 

title for the collection of information is: “Temporary rule for principal trades with certain 

advisory clients, rule 206(3)-3T” and the OMB control number for the collection of 

information is 3235-0630. 

The 2007 Principal Trade Rule Release explains that, under Rule 206(3)-3T, there 

are four distinct collection burdens. Our estimate of the burden of each of the collections 

reflects the fact that the alternative means of compliance provided by the rule is 

substantially similar to the approach advisers currently employ to comply with the 

disclosure and consent obligations of Section 206(3) of the Advisers Act and the 

approach that broker-dealers employ to comply with the confirmation requirements of 

Rule 10b-10 under the Exchange Act. The 2007 Principal Trade Rule Release solicited 

comments on our PRA estimates,53 but we did not receive comment on them. The 

amendment to the rule we are adopting today – to extend the rule for twelve months – 

does not affect the burden estimates contained in the 2007 Principal Trade Rule 

Release.54 

V. COST-BENEFIT ANALYSIS 

52 See 2007 Principal Trade Rule Release, Section V.B&C. 

53 See id., Section V.D. 

54 As discussed above, fewer firms than we anticipated at the time we adopted the rule on 

an interim final basis immediately determined to rely on it and those that did were slower 

than expected in implementing it. We received no comments on our estimate of the 

number of advisers or accounts and, for purposes of this release, are retaining those 

estimates. 
 

 

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We are adopting, as a final temporary rule, Rule 206(3)-3T under the Advisers 

Act, which provides an alternative means for investment advisers that are registered with 

us as broker-dealers to meet the requirements of Section 206(3) when they act in a 

principal capacity with respect to transactions with certain of their advisory clients. 

Other than extending the sunset period of the temporary rule for one year, we are not 

otherwise modifying the rule from the form in which we initially adopted it on an interim 

final basis in September 2007. 

In summary, as explained in the 2007 Principal Trade Rule Release,55 we believe 

the principal benefit of Rule 206(3)-3T is that it maintains investor choice and protects 

the interests of investors who held an estimated $300 bullion in one million fee-based 

brokerage accounts. A resulting second benefit of the rule is that non-discretionary 

advisory clients of advisory firms that are also registered as broker-dealers have easier 

access to a wider range of securities which, in turn, should lead to increased liquidity in 

the markets for these securities and promote capital formation in these areas. A third 

benefit of the rule is that it provides the protections of the sales practice rules of the 

Exchange Act and the relevant self-regulatory organizations because an adviser relying 

on the rule must also be a registered broker-dealer. Another benefit of Rule 206(3)-3T is 

that it provides a lower cost alternative for an adviser to engage in principal transactions. 

We believe there are some benefits associated with extension of the rule for one 

year. By extending the rule for one year, non-discretionary advisory clients who have 

had access to certain securities because of their advisers’ reliance on the rule to trade on a 

principal basis will continue to have access to those securities without disruption. Firms 

For a complete discussion of the benefits for Rule 206(3)-3T, see 2007 Principal Trade 

Rule Release, Section VI. 

55 
 

 

 

 

 

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relying on the rule will continue to be able to offer clients and prospective clients access 

to certain securities on a principal basis as well and will not need during this one-year 

period to incur the cost of adjusting to a new set of rules or abandoning the systems 

established to comply with the current rule. In other words, extension will avoid 

disruption to clients and firms during the period while we consider whether to make the 

rule permanent in its current form or in a modified form or to let it expire. 

As discussed in the 2007 Principal Trade Rule Release,56 we presented estimates 

of the costs of each of the rule’s disclosure elements, including: the prospective 

disclosure and consent; transaction-by transaction disclosure and consent; transaction-bytransaction confirmations; and the annual report of principal transactions. We also 

provided estimates for the following related costs of compliance with Rule 206(3)-3T: 

(i) the initial distribution of prospective disclosure and collection of consents; (ii) systems 

programming costs to ensure that trade confirmations contain all of the information 

required by the rule; and (iii) systems programming costs to aggregate already-collected 

information to generate compliant principal transactions reports.57 Finally, we solicited 

comment on, and requested data to assist us in further developing, our cost and benefit 

estimates.58 

We did not receive comments directly addressing with supporting data the costbenefit analysis we presented in the 2007 Principal Trade Rule Release and we continue 

56	 See 2007 Principal Trade Rule Release, Section VI.D. 

57	 We note that the rule provides an alternative means of compliance with Section 206(3) of 

the Advisers Act. Therefore, there is no requirement that any adviser rely on it. We 

believe that it is reasonable to assume that only those advisers that conclude that the 

benefits in aggregate outweigh the aggregate costs of relying on the rule would choose to 

do so. 

58	 See 2007 Principal Trade Rule Release, Section VI. 
 

 

 

 

 

 

 

17
 

to believe that our estimates reflect the likely costs an adviser would incur to rely on the 

rule.59 Several of the comments described above, however, relating to the utility of 

specific disclosure provisions, along with an additional comment regarding the potential 

effect of the rule on small firms, do have bearing on our cost-benefit analysis of the rule. 

In particular, one commenter argued that the costs of transaction-by-transaction notice 

and consent for sophisticated investors may outweigh the benefits.60 This commenter 

suggested that the rule expressly permit negative consent for principal trading because the 

costs for certain clients who must locate and contact an authorized person to sign an 

affirmative consent on behalf of the client on a timely basis may outweigh the benefits.61 

Another commenter expressed doubt that the benefit of the transaction-by-transaction 

confirmation requirement would outweigh the costs of revising and further burdening the 

standard confirmation form, especially given the rule’s other disclosure and consent 

requirements.62 Another commenter argued that limiting the availability of the rule to 

advisers that also are registered as broker-dealers imposes substantial regulatory burdens 

that are not justified by corresponding investor protection benefits.63 We recognize these 

commenters’ concerns and will consider them, as well as all the other comments we have 

received, if we determine to propose to make the rule permanent in its current or a 

modified form. For purposes of the limited extension at issue here, however, we believe 

59 As discussed above, fewer firms than we anticipated at the time we adopted the rule on 

an interim final basis immediately determined to rely on it. We received no comments on 

our estimate of the number of advisers or accounts and, for purposes of this release, are 

retaining our original estimates. 

60 DPW Letter. 

61 Id. 

62 FD/CFA Letter. 

63 ABA Committee Letter. 
 

 

18
 

the costs of adjustments to practices and systems that may or may not be continued or 

necessary under a potential, future permanent rule would not be justified at this time.64 

We acknowledge that firms relying on the rule would incur operational costs 

associated with complying with the rule for one year. We believe that the estimates of 

the costs we outlined were reasonable, and no commenter provided specific, alternative 

estimates. We believe that the benefits were appropriately identified. We believe that all 

the costs and benefits associated with the rule – which, as noted above, the purpose of 

which was to permit broker-dealers to sell to their non-discretionary advisory clients 

certain securities held in the proprietary accounts of their firms that might not be 

available on an agency basis (or might be available on an agency basis only on less 

attractive terms) should be considered in aggregate. The particular array of disclosure 

requirements and limitations contained in the rule was tailored to safeguard investor 

protection and counterbalance investor protection concerns that might stem from the 

rule’s allowance for transaction-by-transaction notice and consent to principal trades to 

be delivered orally or in written form, instead of just in written form. We believe that, for 

purposes of this one-year extension of the rule, these overall benefits justify the costs 

associated with the rule. 

VI. PROMOTION OF EFFICIENCY, COMPETITION, AND CAPITAL 

FORMATION 

Section 202(c) of the Advisers Act mandates that the Commission, when 

engaging in rulemaking that requires it to consider or determine whether an action is 

necessary or appropriate in the public interest, consider, in addition to the protection of 

See Section II.C. of this Release. 64 
 

 

 

 

 

 

19
 

investors, whether the action will promote efficiency, competition, and capital 

formation.65 

As we explained in the 2007 Principal Trade Rule Release, Rule 206(3)-3T may 

increase efficiency by providing an alternative means of compliance with Section 206(3) 

of the Advisers Act that we believe will be less costly and less burdensome.66 By 

permitting oral transaction-by-transaction disclosure, advisers may be more willing to 

engage in principal trades with advisory clients leading advisers to provide access to 

certain securities the adviser or its affiliate has in inventory. As we noted in the 2007 

Principal Trade Rule Release, firms have argued that making securities available to 

clients through principal trades could lead to faster or less expensive execution, 

advantages a client may deem to outweigh the risks presented by principal trading with 

an adviser.67 

We further explained our expectation that Rule 206(3)-3T will promote 

competition because it preserves investor choice for different types of advisory accounts 

and that, if Rule 206(3)-3T has any effect on capital formation, it is likely to be positive, 

although indirect.68 We also described our understanding that providing an alternative to 

the traditional requirements of transaction-by-transaction written disclosure might serve 

to broaden the potential universe of purchasers of securities, in particular investment 

grade debt securities, for the reasons described in the 2007 Principal Trade Rule Release, 

65 15 U.S.C. 80b-2(c). 

66 2007 Principal Trade Rule Release, Section VII. 

67 Id. 

68 Id. 
 

 

 

 

 

 

20
 

opening the door to greater investor participation in the securities markets with a 

potential positive effect on capital formation.69 

Some commenters, while expressing support for the goal of affording investors 

engaged in principal transactions the protections of both the investment adviser 

regulatory regime (i.e., the Advisers Act and rules thereunder) and the broker-dealer 

regulatory regime (i.e., the Exchange Act and rules thereunder and the rules of applicable 

SROs), opposed the limitation of the temporary rule not only to investment advisers that 

are also registered as broker-dealers, but also to accounts that are subject to both the 

Advisers Act and Exchange Act.70 One of these commenters specifically argued that 

these limitations are unnecessary, contending they provide no additional protection for 

investors engaging in principal transactions because any principal trades conducted for an 

advisory account would be subject to the Exchange Act and SRO rules anyway.71 This 

commenter concluded that the limitation instead merely provides a competitive advantage 

to investment advisers that are also registered broker-dealers.72 

69	 Id., Section II.B.2. 

70	 See, e.g., FPA Letter I; ABA Committee Letter; SIFMA Letter I. Another commenter 

commented upon potential anti-competitive aspects of the rule, in particular as it relates 

to a proposed (but not adopted) interpretive rule that was proposed on the same day Rule 

206(3)-3T was adopted on an interim final basis. IASBDA Letter. See also note 19 

above. Because those comments relate more directly to the proposed interpretive rule, 

they will be considered in conjunction with that interpretive rulemaking. 

71	 FPA Letter I (arguing that a client engaging in a principal trade enjoys the benefits of two 

regulatory regimes regardless of whether the client’s adviser is itself both an investment 

adviser and a broker-dealer for purposes of the federal securities laws or instead affiliated 

with a separate broker-dealer with which the client engages in the trade on a principal 

basis because, in the first instance, a single firm is responsible for meeting all regulatory 

requirements (including those of the Commission and the relevant SRO) and in the 

second, one firm holds the broad fiduciary duties of an adviser (and is subject to 

Commission oversight), while the affiliated broker-dealer must still comply with the 

Commission’s and relevant SRO’s sales practice and best execution requirements). 

72	 Id. 
21
 

We intend to continue to evaluate the effects of the rule on efficiency, competition 

and capital formation as we consider whether to propose to extend or modify the rule or 

allow it to expire. As discussed above, we have no reason to believe, based on our 

experience with the rule to date, that small broker-dealers (or affiliated but separate 

investment advisers and broker-dealers) are put at a competitive disadvantage to larger 

advisers that are themselves also registered as broker-dealers. We believe that the 

effects on efficiency, competition and capital formation of Rule 206(3)-3T as it was 

adopted on an interim final basis warrant its continued operation for the additional 

limited period of time. We anticipate no new effects on efficiency, competition and 

capital formation as a result of the one-year extension. During that time, we will 

continue to assess the rule’s operation and impact along with intervening developments. 

VII. FINAL REGULATORY FLEXIBILITY ACT ANALYSIS 

A final regulatory flexibility analysis (“FRFA”) was prepared in accordance with 

5 U.S.C. 603 when Rule 206(3)-3T was adopted in September 2007. In the 2007 

Principal Trade Rule Release, we analyzed: (i) the need for and objectives of the rule; 

(ii) an estimate of small entities subject to the rule; (iii) the rule’s projected reporting, 

recordkeeping and other compliance requirements; (iv) agency action to minimize the 

effect on small entities; (v) duplicative, overlapping or conflicting federal rules; and (vi) 

significant alternatives. We sought comment on each of these aspects of our FRFA. 

As discussed above, several commenters objected to the condition that advisers 

seeking to rely on the rule must also be registered as broker-dealers and that each account 

must be subject to both the Advisers Act and the Exchange Act (and applicable SRO 

rules). Some contended that the burdens of requiring application of both regulatory 
 

 

 

 

 

 

22
 

regimes do not outweigh the benefits.73 Others essentially argued that limiting the 

availability of the relief under the rule to advisers also registered as broker-dealers might 

be anti-competitive.74 With respect to small entities in particular, one commenter 

suggested that the alternative means of compliance with the Advisers Act’s principal 

trading restrictions made available by Rule 206(3)-3T (in particular, when considered in 

conjunction with the interpretive rule proposed on the same day),75 would disadvantage 

small broker-dealers because they are less likely to also be registered as an investment 

adviser, and as a result would have to form an adviser to take advantage of the benefits of 

the rule.76 

We specifically considered and discussed these issues in the final regulatory 

flexibility analysis in the 2007 Principal Trade Rule Release and believe that it is 

appropriate to continue this condition of the rule for the limited extension. As explained 

above, however, we expect to continue to consider these comments in conjunction with 

data our staff gathers on the operation of the rule in the marketplace, no later than the end 

of the rule’s revised termination date if the Commission intends to propose to continue 

the same or similar relief. 

VIII. STATUTORY AUTHORITY 

The Commission is adopting Rule 206(3)-3T pursuant to Sections 206A and 

211(a) of the Advisers Act. 

TEXT OF RULE 

73 See notes 35-36 and accompanying text above 

74 See notes 70-72 and accompanying text above. 

75 See note 19 above. 

76 IASBDA Letter. 
 

23
 

List of Subjects in 17 CFR Part 275 

Investment advisers, Reporting and recordkeeping requirements. 

For the reasons set out in the preamble, Title 17, Chapter II of the Code of Federal 

Regulations is amended as follows: 

PART 275 -- RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 

1940 

1. The general authority citation for Part 275 continues to read as follows: 

Authority: 15 U.S.C. 80b-2(a)(11)(G), 80b-2(a)(17), 80b-3, 80b-4, 80b-4a, 

80b-6(4), 80b-6a, and 80b-11, unless otherwise noted. 

* * * * * 

2. Section 275.206(3)-3T(d) is amended to read as follows: 

§ 275.206(3)-3T Temporary rule for principal trades with certain advisory clients. 

(d) This section will expire and no longer be effective on December 31, 2010. 

By the Commission. 

Elizabeth M. Murphy 

Secretary 

Dated: December 23, 2009