SECURITIES AND EXCHANGE COMMISSION 

17 CFR Part 275

Release No. IA-3128; 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 amending rule 206(3)-3T 

under the Investment Advisers Act of 1940, a 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. 

The amendment extends the date on which rule 206(3)-3T will sunset from December 31, 

2010 to December 31, 2012.

DATES: The amendments in this document are effective December 30, 2010 and the 

expiration date for 17 CFR 275.206(3)-3T is extended to December 31, 2012. 

FOR FURTHER INFORMATION CONTACT: Brian M. Johnson, Attorney-Adviser, 

Devin F. Sullivan, Senior Counsel, Matthew N. Goldin, Branch Chief, or Sarah A. 

Bessin, Assistant Director, at (202) 551-6787 or IArules@sec.gov, Office of Investment 

Adviser Regulation, Division of Investment Management, U.S. Securities and Exchange 

Commission, 100 F Street, NE, Washington, DC 20549-5041.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission is 

adopting an amendment to temporary rule 206(3)-3T [17 CFR 275.206(3)-3T] under the 
2

Investment Advisers Act of 1940 [15 U.S.C. 80b] that extends the date on which the rule 

will sunset from December 31, 2010 to December 31, 2012. 

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 also registered as brokerdealers 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 In December 

2009, we extended the rule’s sunset period by one year to December 31, 2010.2 

 On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street 

Reform and Consumer Protection Act (the “Dodd-Frank Act”).3

 Under section 913 of 

the Dodd-Frank Act, we are required to conduct a study, and provide a report to 

Congress, concerning the obligations of broker-dealers and investment advisers, 

including the standards of care applicable to those intermediaries and their associated 

 

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

 See Temporary Rule Regarding Principal Trades with Certain Advisory Clients, 

Investment Advisers Act Release No. 2965 (Dec. 23, 2009) [74 FR 69009 (Dec. 30, 

2009)] (“2009 Extension Release”) and Temporary Rule Regarding Principal Trades 

with Certain Advisory Clients, Investment Advisers Act Release No. 2965A (Dec. 31, 

2009) [75 FR 742 (Jan. 6, 2010)] (making a technical correction to the 2009 Extension 

Release). 

3

 Pub. L. No. 111-203, 124 Stat. 1376 (2010). 
3

persons.4 We intend to deliver the report concerning this study, as required by the DoddFrank Act, no later than January 21, 2011.5

 Section 913 of the Dodd-Frank Act also authorizes us to promulgate rules 

concerning, among other things, the legal or regulatory standards of care for brokerdealers, investment advisers, and persons associated with these intermediaries for 

providing personalized investment advice about securities to retail customers. In 

enacting any rules pursuant to this authority, we are required to consider the findings, 

conclusions, and recommendations of the mandated study. The study and our 

consideration of the need for further rulemaking pursuant to this authority are part of our 

broader consideration of the regulatory requirements applicable to broker-dealers and 

investment advisers in connection with the Dodd-Frank Act.6

In light of these legislative developments, we proposed on December 1, 2010 to 

extend the date on which rule 206(3)-3T will sunset for a limited amount of time, from 

December 31, 2010 to December 31, 2012.7 We received 10 comment letters addressing 

 

4

 See generally section 913 of the Dodd-Frank Act and Study Regarding Obligations of 

Brokers, Dealers, and Investment Advisers, Investment Advisers Act Release No. 3058 

(July 27, 2010) [75 FR 44996 (July 30, 2010)]. 

5

 See section 913(d)(1) of the Dodd-Frank Act (requiring us to submit the study to 

Congress no later than six months after the date of enactment of the Dodd-Frank Act). 

6

 The study mandated by section 913 of the Dodd-Frank Act is one of several studies and 

other actions relevant to the regulation of broker-dealers and investment advisers 

mandated by that Act. See, e.g., section 914 of the Dodd-Frank Act (requiring the 

Commission to review and analyze the need for enhanced examination and enforcement 

resources for investment advisers); section 919 of the Dodd-Frank Act (authorizing the 

Commission to issue rules designating documents or information that shall be provided 

by a broker or dealer to a retail investor before the purchase of an investment product or 

service by the retail investor). 

7

 See Temporary Rule Regarding Principal Trades with Certain Advisory Clients, 

Investment Advisers Act Release No. 3118 (Dec. 1, 2010), [75 FR 75650 (Dec. 6, 2010)] 

(“Proposing Release”). 
4

our proposal prior to the expiration of the comment period.8 Six of these commenters 

generally supported extending rule 206(3)-3T,9

 and two commenters opposed an 

extension.10 Two other commenters did not address the extension directly.11 The 

comments we received on our proposal are discussed below. After considering each of 

the comments, we are extending the rule’s sunset period by two years to December 31, 

2012, as proposed. 

II. DISCUSSION 

 We are amending rule 206(3)-3T only to extend the rule’s expiration date by two 

years. Absent further action by the Commission, the rule will expire on December 31, 

2012. We are adopting this extension because, as we discussed in the Proposing Release, 

we believe that firms’ compliance with the substantive provisions of rule 206(3)-3T 

provides sufficient protection to advisory clients to warrant the rule’s continued operation 

for the additional two years while we conduct the study mandated by section 913 of the 

Dodd-Frank Act and consider more broadly the regulatory requirements applicable to 

 

8

 See Comment Letter of the Consumer Federation of America (Dec. 20, 2010) (“CFA 

Letter”); Comment Letter of Bank of America Corporation (Dec. 20, 2010) (“Bank of 

America Letter”); Comment Letter of Fiduciary360 (Dec. 20, 2010) (“Fiduciary360 

Letter”); Comment Letter of Tamar Frankel, Professor of Law, Boston University School 

of Law (Dec. 14, 2010) (“Frankel Letter”); Comment Letter of the National Association 

of Personal Financial Advisors (Dec. 20, 2010) (“NAPFA Letter”); Comment Letter of 

Pickard and Djinis LLP (Dec. 10, 2010) (“Pickard and Djinis Letter”); Comment Letter 

of Public Investors Arbitration Bar Association (Dec. 20, 2010) (“PIABA Letter”); 

Comment Letter of Ron A. Rhoades, JD, CFP (Dec. 20, 2010) (“Rhoades Letter”); 

Comment Letter of the Securities Industry and Financial Markets Association (Dec. 20, 

2010) (“SIFMA Letter”); Comment Letter of Winslow, Evans & Crocker (Dec. 8, 2009) 

(“Winslow, Evans & Crocker Letter”). The comment letters are available at 

http://www.sec.gov/comments/s7-23-07/s72307.shtml. 

9

 See Bank of America Letter; CFA Letter; PIABA Letter; Pickard and Djinis Letter; 

SIFMA Letter; Winslow, Evans & Crocker Letter. We note that PIABA supported a oneyear extension. 

10 See Fiduciary360 Letter; NAPFA Letter. 

11 See Frankel Letter; Rhoades Letter. 
5

broker-dealers and investment advisers.12 As part of our broader consideration of the 

regulatory requirements applicable to broker-dealers and investment advisers, we intend 

to carefully consider principal trading by advisers, including whether rule 206(3)-3T 

should be substantively modified, supplanted, or permitted to expire. 

 If we permit rule 206(3)-3T to expire on December 31, 2010, after that date 

investment advisers also registered as broker-dealers who currently rely on rule 206(3)-

3T would be required to comply with section 206(3)’s transaction-by-transaction written 

disclosure and consent requirements without the benefit of the alternative means of 

complying with these requirements currently provided by rule 206(3)-3T. This could 

limit the access of non-discretionary advisory clients of advisory firms that are also 

registered as broker-dealers to certain securities. In addition, certain of these firms have 

informed us that, if rule 206(3)-3T were to expire on December 31, 2010, it would be 

disruptive to their clients, and the firms would be required to make substantial changes to 

their disclosure documents, client agreements, procedures, and systems. 

 We expect to revisit the relief provided in rule 206(3)-3T soon after the 

completion of our study in January 2011. Although we anticipate that will occur prior to 

the amended expiration date for the temporary rule, we want to ensure that we have 

sufficient time to engage in any potential rulemaking or other process that may emerge 

from either the study or any broader consideration of the regulatory requirements 

applicable to broker-dealers and investment advisers prior to the rule’s expiration. 

 

12 See Proposing Release, Section II. 
6

As discussed above, six commenters generally supported our proposal to amend 

rule 206(3)-3T to extend it,13 and two commenters opposed it.14 Commenters who 

supported the extension cited the disruption to investors that would occur if the rule 

expired at this time, asserting that investors would be forced to change their accounts and 

would lose access to a wider range of securities.15 Commenters who supported the 

extension of the rule also asserted that allowing the rule to sunset would prove disruptive 

to advisory firms that are registered as broker dealers: they explained that expiration of 

the rule would act as an operational barrier to their ability to engage in principal trades 

with their customers.16 These and other commenters further explained that, if the rule 

were allowed to expire, firms relying on the rule would be required to make considerable 

changes to their disclosure documents, client agreements, procedures, and technical 

systems at substantial expense.17 These commenters agreed that extending the rule while 

the Commission conducted its review of the obligations of broker-dealers and investment 

advisers, as mandated by the Dodd-Frank Act, would be the least disruptive option. 

 Conversely, two commenters questioned whether the rule benefits clients and 

asserted that the Commission should not further extend the rule in light of what they view 

as risks posed by the compliance issues that the staff identified.18 One commenter, while 

opposing the extension, encouraged the Commission to take additional measures to 

 

13 See Bank of America Letter; CFA Letter; PIABA Letter; Pickard and Djinis Letter; 

SIFMA Letter; Winslow, Evans & Crocker Letter. 

14 See Fiduciary360 Letter; NAPFA Letter. 

15 See Bank of America Letter; CFA Letter; SIFMA Letter. 

16 See Bank of America Letter; SIFMA Letter. 

17 See Bank of America Letter; SIFMA Letter; Winslow, Evans & Crocker Letter. 

18 See Fiduciary360 Letter; NAPFA Letter. We also note that one commenter who 

supported the extension, CFA, also expressed concern about these compliance issues. 

See CFA Letter. 
7

protect clients from the conflicts of interest raised by principal trading if we chose to 

extend the rule.19 Another commenter challenged the proposition that firms and investors 

would face disruptions if the rule sunsets, asserting that few firms and investors rely on 

the rule.20 

 On balance, and after careful consideration of these comments, we conclude that 

the benefits from extending this rule outweigh the potential costs of an extension. First, 

we believe that permitting the rule to sunset just before we commence a comprehensive 

review of the obligations of broker-dealers and investment advisers could produce 

substantial disruption for investors with accounts serviced by firms relying on the rule. 

These investors might lose access to securities available through principal transactions 

and be forced to convert their accounts in the interim, only to face the possibility of 

future change — and the costs and uncertainty such additional change may entail.21 This 

disruption will be avoided if we maintain the status quo while we engage in our broader 

consideration of the regulatory requirements applicable to broker-dealers and investment 

advisers.22 We continue to believe that the rule benefits investors because it provides 

 

19 See NAPFA Letter. We also note that CFA, while supporting the extension, stated that 

the Commission should address “weaknesses identified in the current approach and 

[back] that rule with tough enforcement focused on the larger issue of the appropriateness 

of recommendations.” CFA Letter. 

20 See Fiduciary360 Letter. 

21 As discussed in the 2007 Principal Trading Release and again in the 2009 Extension 

Release, firms have explained that they may refrain from engaging in principal trading 

with their advisory clients in the absence of the rule given the practical difficulties of 

complying with Section 206(3), and thus may not offer principal trading through advisory 

accounts. See 2007 Principal Trading Release, Section I.B; 2009 Release, Section I. 

22 See CFA Letter (“Although CFA has been critical of the temporary rule and has in the 

past urged the Commission to act expeditiously to replace it, we believe that, at this point, 

revision of the rule is best achieved in conjunction with the Commission’s broader 

consideration of the regulatory requirements applicable to broker-dealers and investment 

advisers.”). 
8

investors with access to a wider range of securities and protects investors who hold 

billions of dollars in advisory accounts. 

 In reaching this conclusion, we have paid particular attention to our staff’s 

observations about firms’ compliance with the rule. We emphasize that we share the 

commenters’ concerns about the compliance issues that the staff identified, the critical 

aspects of which we summarized in the Proposing Release.23 Having carefully 

considered the staff’s observations, we conclude that the requirements of rule 206(3)-3T, 

coupled with regulatory oversight informed by those observations, will adequately 

protect advisory clients during the extension. Throughout the period of the extension, the 

staff will examine firms with higher risk characteristics, including firms that engage in 

principal transactions in reliance on rule 206(3)-3T,24 and continue to take appropriate 

action to help ensure that firms are complying with the rule’s conditions, including 

referring firms to the Division of Enforcement for possible enforcement action if 

warranted. One commenter asserted that the burdens placed on firms by rule 206(3)-3T 

are too stringent.25 As this commenter noted, the staff did not identify instances of 

“dumping,” a harm that section 206(3) is designed to redress, and we believe that the 

conditions and limitations in the rule serve as appropriate safeguards during the pendency 

of the extension. 

 

23 Although some of the commenters suggested that the discussion of the staff’s 

observations in the Proposing Release was not robust enough, we believe the summary 

contained in the release outlined the critical aspects of the issues observed by the staff 

with respect to compliance with the rule. See NAPFA Letter; Fiduciary360 Letter; CFA 

Letter. 

24 One commenter suggested that the Commission’s Office of Compliance Inspections and 

Examinations should conduct additional examinations to determine if firms are 

complying with rule 206(3)-3T, among other requirements. See NAPFA Letter. 

25 See Pickard and Djinis Letter. 
9

 We note that one commenter asserted that even if principal trading relief may 

have been appropriate when we originally adopted rule 206(3)-3T in 2007, it no longer 

is.26 In particular, the commenter contended that the valuation of certain securities — 

such as municipal bonds — has become much more difficult, such that “a much greater 

amount of due diligence is required of the investment adviser who engages in advising 

clients on purchases of individual municipal bonds.” But extension of the rule does not 

have any bearing on an adviser’s due diligence obligations. The standard of care to 

which advisers are subject and the duties they owe clients are in no way diminished by 

their reliance on rule 206(3)-3T.27

 Second, we further conclude that the extension of the rule’s sunset date is 

warranted to avoid the disruption to firms relying on the rule that will occur if the rule 

expires. The letters submitted by three commenters demonstrated that some firms in fact 

do rely on the rule, and that those firms will be faced with uncertainty and disruption of 

operations should the rule expire just as the Commission is about to begin a 

comprehensive review process that may ultimately produce a different regulatory 

standard.28 One commenter that represents securities firms described that large and small 

firms have relied upon the rule, and provided data showing that a substantial number of 

accounts and volume of trades would be affected by a change in the rule.29 

 

26 See NAPFA Letter.

27 See rule 206(3)-3T(b) (“This section shall not be construed as relieving in any way an 

investment adviser from acting in the best interests of an advisory client, including 

fulfilling the duty with respect to the best price and execution for the particular 

transaction for the advisory client; nor shall it relieve such person or persons from any 

obligation that may be imposed by section 206(1) or (2) of the Advisers Act or by other 

applicable provisions of the federal securities laws.”). 

28 See Bank of America Letter; SIFMA Letter; Winslow, Evans & Crocker Letter. 

29 See SIFMA Letter. 
10

We received four comment letters specifically addressing the duration of our 

proposed extension of rule 206(3)-3T.30 Three expressed support for extending the rule 

for an additional two years, but argued that the rule should be made permanent.31 One of 

these commenters cited uncertainty and its attendant costs as a reason to make the rule 

permanent.32 Other commenters supported a shorter extension of the rule. For example, 

one commenter supported a one-year extension.33 This commenter stated that a one-year 

extension of the rule strikes the proper balance between the concerns of investor 

protection and the burden of potential revised regulations applying to investment advisers 

and broker-dealers.34 Two commenters generally opposed the extension and supported 

allowing the rule to expire: one commenter stated alternatively that the Commission 

should adopt a one-year extension with the imposition of other measures to ensure firms’ 

compliance with the rule and with their fiduciary obligations generally, and the other 

indicated that it would support an extension of six months if the Commission provided 

“further explanation and supporting evidence.”35

 As we noted in the Proposing Release, we believe that the rule should be extended 

only for a limited amount of time. 36 That period of time, however, must be long enough 

 

30 See Bank of America Letter; Fiduciary360 Letter; Winslow, Evans & Crocker Letter; 

PIABA Letter. 

31 See Bank of America Letter; Winslow, Evans & Crocker Letter; Pickard and Djinis 

Letter. 

32 See Winslow, Evans & Crocker Letter. 

33 See PIABA Letter. 

34 See id. 

35 See NAPFA Letter; Fiduciary360 Letter. 

36 See Proposing Release, Section II. The statements in the Proposing Release should not 

 be read as limiting the scope of the alternatives we will consider in conducting the study 

 mandated by section 913 of the Dodd-Frank Act and considering more broadly the 

 regulatory requirements applicable to broker-dealers and investment advisers. 
11

to permit the Commission to engage in any rulemaking prompted by our study under 

section 913 of the Dodd-Frank Act and our broader review of regulatory requirements 

applicable to investment advisers and broker-dealers. Having considered the comments 

regarding the duration of the extension, and taking into account the importance of the 

issues that this process will address, the Commission believes on balance that a two-year 

extension is necessary to give the Commission adequate time to complete any such 

rulemaking. Because that process cannot begin until the completion of the study required 

by the Dodd-Frank Act, adopting a six-month or one-year extension, as certain 

commenters recommended, most likely would not provide sufficient time for such 

rulemaking, and thus could result in greater uncertainty (along with its attendant costs) 

for investors and firms that rely on the rule. We believe that certainty in this area is 

important, and we will complete any relevant rulemaking as soon as is feasible consistent 

with administrative procedure. 

A number of commenters also raised issues that were beyond the scope of our 

proposal to extend rule 206(3)-3T, including the broader legal and policy questions 

related to the meaning, scope, and application of a fiduciary standard and the appropriate 

considerations related to principal trading.37 These comments pertain to our broader 

consideration of the regulatory requirements applicable to broker-dealers and investment 

advisers, and we will consider these comments in conducting this broader review. 

III. CERTAIN ADMINISTRATIVE LAW MATTERS 

 The amendment to rule 206(3)-3T is effective on December 30, 2010. The 

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

 

37 See CFA Letter; Fiduciary360 Letter; Frankel Letter; NAPFA Letter; Pickard and Djinis 

Letter; Rhoades Letter; SIFMA Letter. 
12

Federal Register not less than 30 days before its effective date.38 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.39 Rule 206(3)-3T is a 

rule that recognizes an exemption and relieves a restriction and in part has interpretive 

aspects. 

IV. PAPERWORK REDUCTION ACT

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

meaning of the Paperwork Reduction Act of 1995.40 The Office of Management and 

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

Rule Release,41 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 and the Proposing 

Release solicited comments on our PRA estimates, but we did not receive comment on 

them.42 

 The amendment to the rule we are adopting today — to extend rule 206(3)-3T for 

two years — does not affect the burden estimates contained in the 2007 Principal Trade 

 

38 5 U.S.C. 553(d). 

39 Id. 

40 44 U.S.C. 3501 et seq. 

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

42 See 2009 Extension Release, Section IV; Proposing Release, Section IV. 
13

Rule Release. Therefore, as was the case when we extended rule 206(3)-3T in December 

2009, we are not revising our Paperwork Reduction Act burden and cost estimates 

submitted to OMB as a result of this amendment. We will submit burden and cost 

estimates as part of our routine renewal of OMB’s approval of the rule’s collection of 

information. 

V. COST-BENEFIT ANALYSIS 

Other than extending rule 206(3)-3T’s sunset period for two years, we are not 

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

final basis in September 2007 or as final in December 2009. We discussed the benefits 

provided by rule 206(3)-3T in both the 2007 Principal Trade Rule Release and the 2009 

Extension Release. 

In summary, as explained in the 2007 Principal Trade Rule Release, the 2009 

Extension Release, and the Proposing Release,43 we believe the principal benefit of rule 

206(3)-3T is that it maintains investor choice and protects the interests of investors who 

formerly held an estimated $300 billion in 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 continue to 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 Securities Exchange Act of 

1934 (“Exchange Act”)44 and the relevant self-regulatory organizations because an 

 

43 See 2007 Principal Trade Rule Release, Section VI.C; 2009 Extension Release, Section 

V; Proposing Release, Section V. 

44 15 U.S.C. 78 et seq. 
14

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. 

One commenter disputed a number of the benefits of rule 206(3)-3T we have 

described above. The commenter did not provide any specific data, analysis, or other 

information in support of its comment.45 No commenter provided any substantive or 

specific evidence to contradict the Commission’s previous conclusion that the rule 

benefits investors, and the Commission continues to believe that the rule provides those 

benefits.46

In addition to the general benefits described above, there also are benefits to 

extending the rule for an additional two years. By extending the rule for two years, nondiscretionary 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. If we chose not to extend the rule in its current form, 

firms currently relying on the rule would be required to restructure their operations and 

client relationships on or before the rule’s current expiration date — potentially only to 

have to do so again shortly thereafter (first when the rule expires or is modified, and 

again if we adopt a new approach after the study mandated by the Dodd-Frank Act, 

 

45 See NAPFA Letter (questioning the benefits of the rule in: (1) providing protections of 

the sales practice rules of the Exchange Act and the relevant self-regulatory 

organizations; (2) allowing non-discretionary advisory clients of advisory firms that are 

also registered as broker-dealers to have easier access to a wider range of securities 

which, in turn, should continue to lead to increased liquidity in the markets for these 

securities and promote capital formation in these areas; and (3) maintaining investor 

choice). 

46 See 2007 Principal Trade Rule Release, Section VI.C; 2009 Extension Release, Section 

V; Proposing Release, Section V. 
15

discussed above, is complete). Firms 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 two-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 

complete the study mandated by section 913 of the Dodd-Frank Act and our broader 

consideration of the regulatory requirements applicable to broker-dealers and investment 

advisers. 

We also discussed the costs associated with rule 206(3)-3T in the 2007 Principal 

Trade Rule Release, the 2009 Extension Release, and the Proposing Release.47 In the 

2007 Principal Trade Rule Release, we presented estimates of the costs of each of the 

rule’s disclosure elements, including: prospective disclosure and consent; transaction-bytransaction disclosure and consent; transaction-by-transaction 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. We did not receive comments directly addressing with 

supporting data the cost-benefit analysis we presented in the 2007 Principal Trade Rule 

 

47 See 2007 Principal Trade Rule Release, Section VI.D; 2009 Extension Release, Section 

V; Proposing Release, Section V. 
16

Release.48 We do not believe that a two-year extension of rule 206(3)-3T would 

materially affect those costs.49 

We recognize that, as a result of our amendment, firms relying on the rule will 

incur the costs associated with complying with the rule for two additional years. We also 

recognize that a temporary rule, by nature, creates uncertainty, which in turn, may 

generate costs and inefficiency.50 However, we believe that a temporary extension of the 

rule is the most appropriate action that we can take at this time while we conduct the 

study mandated by section 913 of the Dodd-Frank Act and consider more broadly the 

regulatory requirements applicable to broker-dealers and investment advisers.51

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 

 

48 In the 2007 Principal Trade Rule Release, we estimated the total overall costs, including 

estimated costs for all eligible advisers and eligible accounts, relating to compliance with 

rule 206(3)-3T to be $37,205,569. See 2007 Principal Trade Rule Release, Section VI.D. 

49 See Proposing Release, Section V. 

50 See Winslow, Evans & Crocker Letter (“We do, however, feel that extending the 

temporary rule is in the best interest of investors but think that doing so on a temporary 

basis is short sighted and leads to certain inefficiencies, particularly to smaller 

firms...We believe the Commission should adopt the rule on a permanent basis thus 

eliminating uncertainty with respect to compliance in this area.”). See also Bank of 

America Letter (urging the Commission to consider a permanent rule that would allow 

firms to continue acting in a principal capacity in transactions with certain of their 

clients). 

51 See CFA Letter (“If, as we hope, more extensive revisions to the principal trading 

requirements are just around the corner, it would be unduly disruptive to abandon the 

existing system now absent evidence of significant harm to investors.”). 
17

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

formation.52

We explained in the 2007 Principal Trade Rule Release, the 2009 Extension 

Release, and the Proposing Release, the manner in which rule 206(3)-3T, in general, 

would promote these aims.53 We continue to believe that this analysis generally applies 

today. 

As noted in the 2009 Extension Release and Proposing Release, we received 

comments on the 2007 Principal Trade Rule Release from commenters who opposed the 

limitation of the temporary rule to investment advisers that are also registered as brokerdealers, as well as to accounts that are subject to both the Advisers Act and Exchange Act 

as providing a competitive advantage to investment advisers that are also registered 

broker-dealers.54 Based on our experience with the rule to date, just as we noted in the 

2009 Extension Release and Proposing Release, we have no reason to believe that brokerdealers (or affiliated but separate investment advisers and broker-dealers) are put at a 

competitive disadvantage to advisers that are themselves also registered as brokerdealers;55 however we intend to continue to evaluate these effects in connection with our 

broader consideration of the regulatory requirements applicable to broker-dealers and 

investment advisers. 

 

52 15 U.S.C. 80b-2(c). 

53 See 2007 Principal Trade Rule Release, Section VII; 2009 Extension Release, Section VI; 

Proposing Release, Section VI. 

54 See 2009 Extension Release, Section VI; Proposing Release, Section VI; Comment Letter 

of the Financial Planning Association (Nov. 30, 2007). 

55 See 2009 Extension Release, Section VI; Proposing Release, Section VI. 
18

We received one comment letter arguing that rule 206(3)-3T would impede 

capital formation because it would lead to “more numerous and more severe 

violations...of the trust placed by individual investors in their trusted investment 

adviser.”56 While we share the view that numerous and severe violations of trust could 

theoretically impede capital formation, we have not seen any evidence that rule 

206(3)-3T has caused this result. We also reiterate that, in addition to conducting a 

broader review, we will continue to consider any potential violations of the rule and take 

appropriate action as necessary. 

VII. FINAL REGULATORY FLEXIBILITY ANALYSIS 

 The Commission has prepared the following Final Regulatory Flexibility Analysis 

(“FRFA”) regarding the amendment to rule 206(3)-3T in accordance with 5 U.S.C. 604. 

We prepared and included an Initial Regulatory Flexibility Analysis (“IRFA”) in the 

Proposing Release.57 

A. Need for the Rule Amendment 

 We are adopting an amendment to rule 206(3)-3T to extend the rule for two years 

in its current form because we believe that it would be premature to require firms relying 

on the rule to restructure their operations and client relationships before we complete our 

study and our broader consideration of the regulatory requirements applicable to brokerdealers and investment advisers. The objective of the amendment to rule 206(3)-3T, as 

discussed above, is to permit firms currently relying on rule 206(3)-3T to limit the need 

to modify their operations and relationships on multiple occasions, both before and 

potentially after we complete our study and any related rulemaking. 

 

56 See NAPFA Letter. 

57 See Proposing Release, Section VII. 
19

We are amending rule 206(3)-3T pursuant to sections 206A and 211(a) of the 

Advisers Act [15 U.S.C. 80b-6a and 15 U.S.C. 80b-11(a)]. 

B. Significant Issues Raised by Public Comments 

We received one comment letter related to our IRFA.58 The commenter stated 

that extending the rule temporarily, rather than permanently, would create uncertainty, 

thereby causing certain inefficiencies, particularly with regard to smaller firms.59 We 

recognize that a temporary rule, by nature, creates uncertainty, which in turn may 

generate costs and inefficiency, especially for smaller firms. However, as discussed 

above, we believe that a temporary extension of the rule is the most appropriate approach 

at this time while we conduct the study mandated by section 913 of the Dodd-Frank Act 

and consider more broadly the regulatory requirements applicable to broker-dealers and 

investment advisers.60

C. Small Entities Subject to the Rule 

Rule 206(3)-3T is an alternative method of complying with Advisers Act section 

206(3) and is available to all investment advisers that: (i) are registered as broker-dealers 

under the Exchange Act; and (ii) effect trades with clients directly or indirectly through a 

broker-dealer controlling, controlled by or under common control with the investment 

adviser, including small entities. Under Advisers Act rule 0-7, for purposes of the 

Regulatory Flexibility Act an investment adviser generally is a small entity if it: (i) has 

assets under management having a total value of less than $25 million; (ii) did not have 

 

58 See Winslow, Evans & Crocker Letter. 

59 See id. 

60 See CFA Letter (“If, as we hope, more extensive revisions to the principal trading 

requirements are just around the corner, it would be unduly disruptive to abandon the 

existing system now absent evidence of significant harm to investors.”). 
20

total assets of $5 million or more on the last day of its most recent fiscal year; and (iii) 

does not control, is not controlled by, and is not under common control with another 

investment adviser that has assets under management of $25 million or more, or any 

person (other than a natural person) that had $5 million or more on the last day of its most 

recent fiscal year.61

As noted in the Proposing Release, we estimate that as of November 1, 2010, 680 

SEC-registered investment advisers were small entities.62 As discussed in the 2007 

Principal Trade Rule Release, we opted not to make the relief provided by rule 206(3)-3T 

available to all investment advisers, and instead have restricted it to investment advisers 

that also are registered as broker-dealers under the Exchange Act.63 We therefore 

estimate for purposes of this FRFA that 38 of these small entities (those that are both 

investment advisers and broker-dealers) could rely on rule 206(3)-3T.64 We did not 

receive any comments on these estimates.

D. Reporting, Recordkeeping, and other Compliance Requirements 

The provisions of rule 206(3)-3T impose certain reporting or recordkeeping 

requirements, and our amendment will extend the imposition of these requirements for an 

additional two years. The two-year extension will not alter these requirements. 

Rule 206(3)-3T is designed to provide an alternative means of compliance with 

the requirements of section 206(3) of the Advisers Act. Investment advisers taking 

advantage of the rule with respect to non-discretionary advisory accounts are required to 

 

61 See 17 CFR 275.0-7. 

62 IARD data as of November 1, 2010. 

63 See 2007 Principal Trade Rule Release, Section VIII.B. 

64 IARD data as of November 1, 2010. 
21

make certain disclosures to clients on a prospective, transaction-by-transaction and 

annual basis. 

Specifically, rule 206(3)-3T permits an adviser, with respect to a nondiscretionary advisory account, to comply with section 206(3) of the Advisers Act by, 

among other things: (i) making certain written disclosures; (ii) obtaining written, 

revocable consent from the client prospectively authorizing the adviser to enter into 

principal trades; (iii) making oral or written disclosure and obtaining the client’s consent 

orally or in writing prior to the execution of each principal transaction; (iv) sending to the 

client confirmation statements for each principal trade that disclose the capacity in which 

the adviser has acted and indicating that the client consented to the transaction; and (v) 

delivering to the client an annual report itemizing the principal transactions. Advisers are 

already required to communicate the content of many of the disclosures pursuant to their 

fiduciary obligations to clients. Other disclosures are already required by rules applicable 

to broker-dealers. 

Our amendment will only extend the rule for two years in its current form. 

Advisers currently relying on the rule already should be making the disclosures described 

above. 

E. Agency Action to Minimize Effect on Small Entities 

The Regulatory Flexibility Act directs us to consider significant alternatives that 

would accomplish our stated objective, while minimizing any significant adverse impact 

on small entities.65 Alternatives in this category would include: (i) establishing different 

compliance or reporting standards or timetables that take into account the resources 

 

65 See 5 U.S.C. 603(c). 
22

available to small entities; (ii) clarifying, consolidating, or simplifying compliance 

requirements under the rule for small entities; (iii) using performance rather than design 

standards; and (iv) exempting small entities from coverage of the rule, or any part of the 

rule. 

We believe that special compliance or reporting requirements or timetables for 

small entities, or an exemption from coverage for small entities, may create the risk that 

the investors who are advised by and effect securities transactions through such small 

entities would not receive adequate disclosure. Moreover, different disclosure 

requirements could create investor confusion if it creates the impression that small 

investment advisers have different conflicts of interest with their advisory clients in 

connection with principal trading than larger investment advisers. We believe, therefore, 

that it is important for the disclosure protections required by the rule to be provided to 

advisory clients by all advisers, not just those that are not considered small entities. 

Further consolidation or simplification of the rule for investment advisers that are small 

entities would be inconsistent with the Commission’s goals of fostering investor 

protection. 

We have endeavored through rule 206(3)-3T to minimize the regulatory burden 

on all investment advisers eligible to rely on the rule, including small entities, while 

meeting our regulatory objectives. It was our goal to ensure that eligible small entities 

may benefit from the Commission’s approach to the new rule to the same degree as other 

eligible advisers. The condition that advisers seeking to rely on the rule must also be 

registered as broker-dealers and that each account with respect to which an adviser seeks 

to rely on the rule must be a brokerage account subject to the Exchange Act, and the rules 
23

thereunder, and the rules of the self-regulatory organization(s) of which it is a member, 

reflect what we believe is an important element of our balancing between easing 

regulatory burdens (by affording advisers an alternative means of compliance with 

section 206(3) of the Act) and meeting our investor protection objectives.66 Finally, we 

do not consider using performance rather than design standards to be consistent with our 

statutory mandate of investor protection in the present context.

VIII. STATUTORY AUTHORITY

The Commission is amending rule 206(3)-3T pursuant to sections 206A and 

211(a) of the Advisers Act. 

LIST OF SUBJECTS IN 17 CFR PART 275 

Investment advisers, Reporting and recordkeeping requirements. 

TEXT OF RULE AMENDMENT 

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 authority citation for Part 275 continues to read in part 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. 

* * * * * 

 

66 See 2007 Principal Trade Rule Release, Section II.B.7 (noting commenters that objected 

to this condition as disadvantaging small broker-dealers (or affiliated but separate 

investment advisers and broker-dealers)). 
24

 §275.206(3)-3T [Amended] 

 2. In § 275.206(3)-3T, amend paragraph (d) by removing the words “December 

31, 2010” and adding in their place “December 31, 2012.” 

By the Commission. 

Elizabeth M. Murphy 

Secretary 

Dated: December 28, 2010