75650 Federal Register / Vol. 75, No. 233 / Monday, December 6, 2010 / Proposed Rules 

1Rule 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 (DC Cir. 2007). In the FPA 

Decision, handed down on March 30, 2007, the 

Court of Appeals for the DC 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 feebased brokerage accounts were not advisory 

accounts and were thus not subject to the Advisers 

Act. For further discussion of fee-based brokerage 

accounts, see 2007 Principal Trade Rule Release, 

Section I. 

3See 2007 Principal Trade Rule Release at nn.19– 

20 and Section VI.C. 

ARM–1, 800 Independence Avenue, 

SW., Washington, DC 20591, or by 

calling (202) 267–9680. Make sure to 

identify the docket number or notice 

number of this proposal. 

Background 

On November 5, 2010 the FAA 

published a Notice of Proposed Policy, 

entitled Policy Clarifying Definition of 

‘‘Actively Engaged’’ for the Purpose of 

Inspector Authorization. (75 FR 68249, 

Docket No. FAA–2010–1060.) 

Comments to that document were to be 

received on or before December 6, 2010. 

By letter dated November 16, 2010, 

the Experimental Aircraft Association 

(EAA) requested an extension of the 

comment period to January 17, 2011. By 

letter dated November 22, 2010, the 

Aircraft Owners and Pilots Association 

(AOPA) requested a 60-day extension of 

the comment period. Both petitioners 

stated the additional time is necessary 

to fully investigate the proposal’s 

potential negative impact on the 

industry and because of the impact of 

upcoming holidays on their opportunity 

to provide meaningful comments. 

Extension of Comment Period 

In accordance with § 11.47(c) of Title 

14, Code of Federal Regulations, the 

FAA has reviewed the petitions for 

extension by EAA and AOPA. The FAA 

agrees with the petitioners that an 

opportunity for meaningful comment is 

in the public interest. However, the 

FAA does not support extending the 

comment period by 60 days. This 

proposed policy does not constitute a 

significant change from current FAA 

policy regarding inspector authorization 

but is merely a clarification of that 

policy as stated in the Notice of 

Proposed Policy. 

The FAA supports an extension to 

January 17, 2011 to allow additional 

time to investigate and develop 

meaningful comments in light of the 

holiday schedule. The FAA has 

determined that an extension of the 

comment period is consistent with the 

public interest, and that good cause 

exists for taking this action. 

Accordingly, the comment period for 

this Notice of Proposed Policy is 

extended until January 17, 2011. Absent 

unusual circumstances, the FAA does 

not anticipate any further extension of 

the comment period. 

Issued in Washington, DC, on December 2, 

2010. 

Carol Giles, 

Manager, Aircraft Maintenance Division of 

Flight Standards Service. 

[FR Doc. 2010–30604 Filed 12–3–10; 8:45 am] 

BILLING CODE 4910–13–P 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Part 275 

[Release No. IA–3118; File No. S7–23–07] 

RIN 3235–AJ96 

Temporary Rule Regarding Principal 

Trades With Certain Advisory Clients 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Proposed rule. 

SUMMARY: The Securities and Exchange 

Commission is proposing to amend 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 would 

extend the date on which rule 206(3)– 

3T will sunset from December 31, 2010 

to December 31, 2012. 

DATES: Comments must be received on 

or before December 20, 2010. 

ADDRESSES: Comments may be 

submitted by any of the following 

methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/proposed.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number S7–23–07 on the subject line; 

or 

• Use the Federal eRulemaking Portal 

(http://www.regulations.gov). Follow the 

instructions for submitting comments. 

Paper Comments 

• Send paper comments in triplicate 

to Elizabeth M. Murphy, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Number S7–23–07. This file number 

should be included on the subject line 

if e-mail is used. To help us process and 

review your comments more efficiently, 

please use only one method. The 

Commission will post all comments on 

the Commission’s Internet Web site 

(http://www.sec.gov/rules/ 

proposed.shtml). Comments are also 

available for Web site viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street, NE., 

Washington, DC 20549 on official 

business days between the hours of 10 

a.m. and 3 p.m. All comments received 

will be posted without change; we do 

not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. 

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 

proposing an amendment to temporary 

rule 206(3)–3T [17 CFR 275.206(3)–3T] 

under the Investment Advisers Act of 

1940 [15 U.S.C. 80b] that would extend 

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 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 


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4As a consequence of the FPA Decision, brokerdealers offering fee-based brokerage accounts with 

an advisory component 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; 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. 

5See Temporary Rule Regarding Principal Trades 

with Certain Advisory Clients, Investment Advisers 

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

(Dec. 30, 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 

Extension Release). 

6See Extension Release, Section II.c. 

7Public Law 111–203, 124 Stat. 1376 (2010). 

8See 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)]. 

9See 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). 

10Rule 206(3)–3T is available only to an 

investment adviser that is a broker-dealer registered 

under section 15 of the Securities Exchange Act of 

1934 [15 U.S.C. 78o]. Rule 206(3)–3T(a)(7). 

11See supra note 8 and accompanying text. 

12See supra note 9 and accompanying text. 

13The 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 DoddFrank 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). 

14For a discussion of some of the benefits 

underlying rule 206(3)–3T, see 2007 Principal 

Trade Rule Release, Section VI.C. 

15See id. 

16The Office of Compliance Inspections and 

Examinations conducted examinations regarding 

compliance with rule 206(3)–3T. The staff’s 

observations discussed in this release are from these 

examinations. 

17Congress intended section 206(3) to address 

concerns that an adviser might engage in principal 

transactions to benefit itself or its affiliates, rather 

than the client. In particular, Congress was 

concerned that advisers might use advisory 

accounts to ‘‘dump’’ unmarketable securities or 

those the advisers fear may decline in value. See 

Investment Trusts and Investment Companies: 

Hearings on S. 3580 Before the Subcomm. of the 

Comm. on Banking and Currency, 76th Cong., 3d 

Sess. 320, 322 (1940) (‘‘[i]f a fellow feels he has a 

sour issue and finds a client to whom he can sell 

it, then that is not right. * * * ’’) (statement of 

Continued 

conflicts of interest as a result of such 

transactions.4

As initially adopted on an interim 

final basis, rule 206(3)–3T was set to 

expire on December 31, 2009. In 

December 2009, however, we adopted 

rule 206(3)–3T as a final rule in the 

same form in which it was adopted on 

an interim final basis in 2007, except 

that we extended the rule’s sunset 

period by one year to December 31, 

2010.5 We deferred final action on rule 

206(3)–3T in December 2009 because 

we needed additional time to 

understand how, and in what situations, 

the rule was being used.6

On July 21, 2010, President Obama 

signed into law the Dodd-Frank Wall 

Street Reform and Consumer Protection 

Act (the ‘‘Dodd-Frank Act’’).7 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 

persons.8 We intend to deliver the 

report concerning this study, as required 

by the Dodd-Frank Act, no later than 

January 21, 2011.9

Our staff has observed the use of the 

rule by entities that are investment 

advisers also registered with us as 

broker-dealers.10 Of the firms contacted 

by our staff, some firms indicated that 

they were relying on the rule. As 

discussed more fully below, our staff 

observed several compliance issues. The 

staff is pursuing those matters where 

appropriate, including referrals to the 

Division of Enforcement. 

II. Discussion 

We are proposing to amend rule 

206(3)–3T only to extend the rule’s 

expiration date by two additional years. 

If the rule is amended, absent further 

action by the Commission, the rule will 

expire on December 31, 2012. 

As noted above, 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 standard of care 

applicable to those intermediaries.11 We 

are required to deliver the report 

concerning this study no later than six 

months after the enactment of the DoddFrank Act, in January 2011.12

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 

broker-dealers, 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 brokerdealers and investment advisers in 

connection with the Dodd-Frank Act.13

As part of this study and any 

rulemaking that may follow, we expect 

to consider the issues raised by 

principal trading, including the 

restrictions in section 206(3) of the 

Advisers Act and our experiences with, 

and observations regarding, the 

operation of rule 206(3)–3T. We will 

not, however, complete our 

consideration of these issues before 

December 31, 2010, rule 206(3)–3T’s 

current expiration date. 

We believe that firms’ compliance 

with the substantive provisions of rule 

206(3)–3T as currently in effect provides 

sufficient protections to advisory clients 

to warrant the rule’s continued 

operation for an additional limited 

period of time while we conduct the 

study mandated by the Dodd-Frank Act 

and consider more broadly the 

regulatory requirements applicable to 

broker-dealers and investment 

advisers.14

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.15 In 

addition, certain of these firms have 

informed us that, if rule 206(3)–3T were 

to expire on December 31, 2010, they 

would be required to make substantial 

changes to their disclosure documents, 

client agreements, procedures, and 

systems. 

As noted above, our staff has observed 

the use of the rule by entities that are 

investment advisers and are also 

registered as broker-dealers.16 Of the 

firms contacted by our staff, some 

indicated that they were relying on the 

rule. Significantly, among those 

advisers, our staff did not identify 

instances of ‘‘dumping,’’ a particular 

concern underlying section 206(3) of the 

Advisers Act.17 However, our staff did 


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75652 Federal Register / Vol. 75, No. 233 / Monday, December 6, 2010 / Proposed Rules 

David Schenker, Chief Counsel, Securities and 

Exchange Commission Investment Trust Study). 

18For example, the staff observed instances in 

which transactions in underwritten securities were 

not identified as being executed in a principal 

capacity, even when these securities passed through 

a firm’s inventory. In addition, the staff observed 

instances in which firms executed principal 

transactions in reliance on rule 206(3)–3T in 

securities that were ineligible for trading pursuant 

to the rule. 

19For example, in some instances, automated 

compliance systems erroneously permitted advisory 

client transactions to be executed on a principal 

basis for clients that had not authorized such 

transactions. 

20See 2007 Principal Trade Rule Release, Section 

II.B.8 (‘‘ * * * an adviser relying on rule 206(3)– 

3T as an alternative means of complying with 

section 206(3) must have adopted and implemented 

written policies and procedures reasonably 

designed to comply with the requirements of the 

rule.’’); Rule 206(4)–7(a) [17 CFR 275.206(4)–7(a)] 

(requiring an investment adviser registered with us 

to adopt and implement written policies and 

procedures reasonably designed to prevent 

violations of the Advisers Act (and the rules 

thereunder) by the adviser or any of its supervised 

persons). 

21Such observations were made with respect to 

prospective written disclosures, transaction-bytransaction disclosures, and client annual reports. 

For example, the staff observed instances in which 

firms placed limitations on clients’ ability to revoke 

their permission to execute transactions on a 

principal basis. The staff also observed instances in 

which annual summary reports were not sent to 

clients or were incomplete. 

22For example, the staff observed instances in 

which confirmations did not clearly state that the 

client’s consent was given prior to execution. 

23For example, in some instances, the staff was 

unable to verify whether oral transaction-bytransaction disclosures were, in fact, provided. The 

staff also observed instances in which it was unable 

to establish whether certain transactions were, in 

fact, subject to section 206(3). 

24See supra note 17. 

25 44 U.S.C. 3501 et seq. 

26See 2007 Principal Trade Rule Release, Section 

V.B&C. 

27See Extension Release, Section IV. 

observe certain compliance issues, 

including but not limited to instances in 

which firms: 

• Did not comply with section 206(3) 

or rule 206(3)–3T for certain 

transactions that were executed on a 

principal basis;18

• Demonstrated weaknesses relating 

to compliance monitoring of electronic 

systems to identify principal trades and 

to validate compliance with rule 206(3)– 

3T’s disclosure and consent 

provisions; 19

• Failed to test periodically the 

adequacy of their compliance programs; 

• Had inadequate policies and 

procedures concerning rule 206(3)– 

3T;20

• Did not provide disclosures or 

provided disclosures that appeared to be 

potentially confusing, misleading, or 

incomplete;21

• Failed to obtain transaction-bytransaction consent; 

• Provided written confirmations that 

appeared to be potentially confusing or 

incomplete;22 and 

• Maintained books and records in a 

manner that did not enable the staff 

meaningfully to assess compliance with 

rule 206(3)–3T.23

We find it important that the staff 

found no instances of ‘‘dumping’’ by 

advisers the staff observed were relying 

on rule 206(3)–3T.24 However, we 

remain concerned about the compliance 

issues observed by the staff. As noted 

above, the staff is pursuing those 

matters where appropriate, including 

referrals to the Division of Enforcement. 

If the rule is extended, the staff will 

monitor compliance 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 if 

warranted. We further encourage all 

firms that rely on rule 206(3)–3T to 

evaluate whether they have any of the 

compliance issues discussed in this 

Release, and if so, to take steps to 

address them. 

In light of these and other 

considerations discussed in this 

Release, we believe that it would be 

premature to require these firms to 

restructure their operations and client 

relationships before we complete our 

study and our broader consideration of 

the regulatory requirements applicable 

to broker-dealers and investment 

advisers. To the extent our 

consideration of these issues leads to 

new rules concerning principal trading, 

these firms would again be required to 

restructure their operations and client 

relationships, potentially at substantial 

expense. 

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. In 

making these determinations, we expect 

to consider, among other things, the 

results of the study required by section 

913 of the Dodd-Frank Act, relevant 

comments received in connection with 

the study and any potential rulemaking 

that may follow, the results of our staff’s 

evaluation of the operation of rule 

206(3)–3T, any relevant comments we 

receive in connection with this 

proposal, and comments we received in 

response to the 2007 Principal Trade 

Rule Release. 

We expect to revisit the relief 

provided in rule 206(3)–3T following 

the completion of our study. Although 

we anticipate that will occur prior to the 

proposed amended expiration date for 

the temporary rule, we want to ensure 

that we have sufficient time to complete 

any potential rulemaking process prior 

to the rule’s expiration. 

III. Request for Comment 

We request comment on our proposal 

to extend rule 206(3)–3T for two 

additional years. 

• Is it appropriate to extend rule 

206(3)–3T for a limited period of time 

in its current form while we complete 

our study and our broader consideration 

of the regulatory requirements 

applicable to broker-dealers and 

investment advisers? Or should we 

allow the rule to expire? 

• Given the compliance issues 

observed, is extending the rule 

appropriate? 

• Is two years an appropriate period 

of time to extend the rule? Or should we 

extend the rule for a different period of 

time? If so, for how long? 

IV. Paperwork Reduction Act 

Rule 206(3)–3T contains ‘‘collection of 

information’’ requirements within the 

meaning of the Paperwork Reduction 

Act of 1995.25 The Office of 

Management and Budget (‘‘OMB’’) 

approved the burden estimates 

presented in the 2007 Principal Trade 

Rule Release,26 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. As noted in 

the Extension Release, the 2007 

Principal Trade Rule Release solicited 

comments on our PRA estimates, but we 

did not receive comment on them.27

The amendment to the rule we are 

proposing today—to extend rule 206(3)– 

3T for two years— does not affect the 

burden estimates contained in the 2007 

Principal Trade 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. 

We request comment on whether the 

estimates and underlying assumptions 

that are more fully described in the 2007 

Principal Trade Rule Release continue 


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28See 2007 Principal Trade Rule Release, Section 

V. 

29See id., Section VI; Extension Release, Section 

V. 

30 15 U.S.C. 78 et seq. 

31 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. 

32 15 U.S.C. 80b–2(c). 

33See Extension Release, Section VI; Comment 

Letter of the Financial Planning Association (Nov. 

30, 2007). 

34See Extension Release, Section VI. 

to be reasonable.28 Have circumstances 

changed since that time such that these 

estimates should be modified or 

revised? Persons submitting comments 

should direct the comments to the 

Office of Management and Budget, 

Attention: Desk Officer for the 

Securities and Exchange Commission, 

Office of Information and Regulatory 

Affairs, Washington, DC 20503, and 

should send a copy to Elizabeth M. 

Murphy, Secretary, Securities and 

Exchange Commission, 100 F Street, 

NE., Washington, DC 20549–1090, with 

referece to File No. S7–23–07. 

V. Cost-Benefit Analysis 

Other than proposing to extend rule 

206(3)–3T’s sunset period for two years, 

we are not otherwise proposing to 

modify 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 Extension Release. 

In summary, as explained in the 2007 

Principal Trade Rule Release and the 

Extension Release,29 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’’)30 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 did not 

receive comments directly addressing 

with supporting data the cost-benefit 

analysis we presented in the 2007 

Principal Trade Rule Release and we 

continue to believe those benefits apply 

today. 

In addition to the general benefits 

described in those releases, there also 

are benefits to extending the rule for an 

additional two years. If we do not 

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, 

discussed above, is complete). 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 would 

continue to have access to those 

securities without disruption. Firms 

relying on the rule would continue to be 

able to offer clients and prospective 

clients access to certain securities on a 

principal basis as well and would 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 would 

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 brokerdealers and investment advisers. 

We also described the costs associated 

with rule 206(3)–3T, including the 

operational costs associated with 

complying with the rule, in the 2007 

Principal Trade Rule Release and the 

Extension Release. We presented 

estimates of the costs of each of the 

rule’s disclosure elements, including: 

Prospective disclosure and consent; 

transaction-by-transaction 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 Release and 

we believe the amendments we are 

proposing today would not materially 

affect those costs.31

We recognize that if today’s 

amendment is adopted, firms relying on 

the rule would incur the costs 

associated with complying with the rule 

for two additional years. 

We request comment on all aspects of 

the cost-benefit analysis, including the 

accuracy of the potential costs and 

benefits identified and assessed in this 

Release, the 2007 Principal Trade Rule 

Release and the Extension Release, as 

well as any other costs or benefits that 

may result from the proposal. 

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 investors, whether the 

action will promote efficiency, 

competition, and capital formation.32

We explained in the 2007 Principal 

Trade Rule Release and the Extension 

Release the manner in which rule 

206(3)–3T, in general, would promote 

these aims. We continue to believe that 

this analysis generally applies today. 

As noted in the Extension 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 

broker-dealers, 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 brokerdealers.33 Based on our experience with 

the rule to date, just as we noted in the 

Extension Release, we have no reason to 

believe that broker-dealers (or affiliated 

but separate investment advisers and 

broker-dealers) are put at a competitive 

disadvantage to advisers that are 

themselves also registered as brokerdealers;34 however we intend to 

continue to evaluate the effects of the 

rule on efficiency, competition and 

capital formation as we complete the 

study mandated by section 913 of the 

Dodd-Frank Act and our broader 

consideration of the regulatory 

requirements applicable to brokerdealers and investment advisers. 


jdjones on DSK8KYBLC1PROD with PROPOSALS-1
75654 Federal Register / Vol. 75, No. 233 / Monday, December 6, 2010 / Proposed Rules 

35 5 U.S.C. 603(a). 

36See 17 CFR 275.0–7. 

37 IARD data as of November 1, 2010. 

38See 2007 Principal Trade Rule Release, Section 

VIII.B. 

39 IARD data as of November 1, 2010. 

We anticipate no new effects on 

efficiency, competition and capital 

formation would result from the twoyear extension. However, during that 

time, we would continue to assess the 

rule’s operation and impact along with 

intervening developments. 

We request comment on whether the 

proposal, if adopted, would promote 

efficiency, competition, and capital 

formation. Commenters are requested to 

provide empirical data to support their 

views. 

VII. Initial Regulatory Flexibility Act 

Analysis 

The Commission has prepared the 

following Initial Regulatory Flexibility 

Analysis (‘‘IRFA’’) regarding the 

proposed amendment to rule 206(3)–3T 

in accordance with section 3(a) of the 

Regulatory Flexibility Act.35

A. Reasons for Proposed Action 

We are proposing to extend rule 

206(3)–3T 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. 

B. Objectives and Legal Basis 

The objective of the proposed 

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. 

We are proposing to amend 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)]. 

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 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.36

We estimate that as of November 1, 

2010, 680 SEC-registered investment 

advisers were small entities.37 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.38 We therefore estimate for 

purposes of this IRFA that 38 of these 

small entities (those that are both 

investment advisers and broker-dealers) 

could rely on rule 206(3)–3T.39

D. Reporting, Recordkeeping, and Other 

Compliance Requirements 

The provisions of rule 206(3)–3T 

impose certain reporting or 

recordkeeping requirements, and our 

proposal, if adopted, would extend the 

imposition of these requirements for an 

additional two years. We do not, 

however, expect that the proposed twoyear extension would 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 

would be required to 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 brokerdealers. 

Our proposed amendment, if adopted, 

only would 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. Duplicative, Overlapping, or 

Conflicting Federal Rules 

We believe that there are no rules that 

duplicate or conflict with rule 206(3)– 

3T, which presents an alternative means 

of compliance with the procedural 

requirements of section 206(3) of the 

Advisers Act that relate to principal 

transactions. 

We note, however, that rule 10b–10 

under the Exchange Act is a separate 

confirmation rule that requires brokerdealers to provide certain information to 

their customers regarding the 

transactions they effect. Furthermore, 

FINRA rule 2230 requires broker-dealers 

that are members of FINRA to deliver a 

written notification containing certain 

information, including whether the 

member is acting as a broker for the 

customer or is working as a dealer for 

its own account. Brokers and dealers 

typically deliver this information in 

confirmations that fulfill the 

requirements of rule 10b–10 under the 

Exchange Act. Rule G–15 of the 

Municipal Securities Rulemaking Board 

also contains a separate confirmation 

rule that governs member transactions 

in municipal securities, including 

municipal fund securities. In addition, 

investment advisers that are qualified 

custodians for purposes of rule 206(4)– 

2 under the Advisers Act and that 

maintain custody of their advisory 

clients’ assets must send quarterly 

account statements to their clients 

pursuant to rule 206(4)–2(a)(3) under 

the Advisers Act. 

These rules overlap with certain 

elements of rule 206(3)–3T, but we 

designed the temporary rule to work 

efficiently together with existing rules 

by permitting firms to incorporate the 

required disclosure into one 

confirmation statement. 

F. Significant Alternatives 

The Regulatory Flexibility Act directs 

us to consider significant alternatives 

that would accomplish our stated 


jdjones on DSK8KYBLC1PROD with PROPOSALS-1
Federal Register / Vol. 75, No. 233 / Monday, December 6, 2010 / Proposed Rules 75655 

40See 5 U.S.C. 603(c). 

41See 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)). 

42Public Law 104–121, Title II, 110 Stat. 857 

(1996) (codified in various sections of 5 U.S.C., 15 

U.S.C. and as a note to 5 U.S.C. 601). 

1United States Postal Service Request for SemiPermanent Exception from Periodic Reporting of 

Service Performance Measurement or, in the 

Alternative, Petition for Rulemaking Concerning 39 

CFR 3055.45(a), November 23, 2010 (Request); see 

also Docket No. RM2009–11, Order Establishing 

Final Rules Concerning Periodic Reporting of 

Continued 

objective, while minimizing any 

significant adverse impact on small 

entities.40 Alternatives in this category 

would include: (i) Establishing different 

compliance or reporting standards or 

timetables that take into account the 

resources 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 proposals 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 

thereunder, and the rules of the selfregulatory 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.41 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. 

G. Solicitation of Comments 

We solicit written comments 

regarding our analysis. We request 

comment on whether the rule will have 

any effects that we have not discussed. 

We request that commenters describe 

the nature of any impact on small 

entities and provide empirical data to 

support the extent of the impact. 

Do small investment advisers believe 

an alternative means of compliance with 

section 206(3) of the Advisers Act 

should be available to more of them? 

VIII. Consideration of Impact on the 

Economy 

For purposes of the Small Business 

Regulatory Enforcement Fairness Act of 

1996, or ‘‘SBREFA,’’ 42 we must advise 

OMB whether a proposed regulation 

constitutes a ‘‘major’’ rule. Under 

SBREFA, a rule is considered ‘‘major’’ 

where, if adopted, it results in or is 

likely to result in: (1) An annual effect 

on the economy of $100 million or 

more; (2) a major increase in costs or 

prices for consumers or individual 

industries; or (3) significant adverse 

effects on competition, investment or 

innovation. 

We request comment on the potential 

impact of the proposed amendment on 

the economy on an annual basis. 

Commenters are requested to provide 

empirical data and other factual support 

for their views to the extent possible. 

IX. Statutory Authority 

The Commission is proposing to 

amend 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 Proposed Rule Amendment 

For the reasons set out in the 

preamble, Title 17, Chapter II of the 

Code of Federal Regulations is proposed 

to be 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. 

* * * * * 

§ 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.’’ 

Dated: December 1, 2010. 

By the Commission. 

Elizabeth M. Murphy, 

Secretary. 

[FR Doc. 2010–30590 Filed 12–2–10; 4:15 pm] 

BILLING CODE 8011–01–P 

POSTAL REGULATORY COMMISSION 

39 CFR Part 3055 

[Docket No. RM2011–4; Order No. 600] 

Periodic Reporting Rules 

AGENCY: Postal Regulatory Commission. 

ACTION: Notice of rulemaking. 

SUMMARY: The Postal Service has filed a 

request for a semi-permanent waiver of 

periodic reporting rules concerning 

service performance for First-Class Mail 

Flats at the District level or, in the 

alternative, a rulemaking petition 

seeking deletion of this reporting 

requirement. This document addresses 

the Postal Service’s filing and identifies 

related procedural steps, including a 

request for public comments. 

DATES: Comments are due: December 

14, 2010. 

ADDRESSES: Submit comments 

electronically via the Commission’s 

Filing Online system. Commenters who 

cannot submit filings electronically 

should contact the person identified in 

the FOR FURTHER INFORMATION CONTACT

section for advice on alternatives. 

FOR FURTHER INFORMATION CONTACT: 

Stephen L. Sharfman, General Counsel, 

at stephen.sharfman@prc.gov or 202– 

789–6820. 

SUPPLEMENTARY INFORMATION: On 

November 23, 2010, the Postal Service 

filed a request for a semi-permanent 

exception from periodic reporting of 

service performance measurement for 

First-Class Mail Flats at the District 

level pursuant to Commission Order No. 

465 and 39 CFR 3055.3(a)(1).1


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