82236 Federal Register / Vol. 75, No. 250 / Thursday, December 30, 2010 / Rules and Regulations 

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’’). 

2See 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). 

3Pub. L. 111–203, 124 Stat. 1376 (2010). 

4See 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)]. 

5See 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). 

6The study mandated by section 913 of the DoddFrank 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). 

7See 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’’). 

8See 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. 

Airway Segment Changeover Points 

From To Distance From 

§ 95.8005 Jet Routes Changeover Points 

J537 Is Amended To Delete Changeover Point 

Mullan Pass, ID VOR/DME .............................................. Calgary, CA VORTAC ...................................................... 95 Mullan Pass 

[FR Doc. 2010–32233 Filed 12–29–10; 8:45 am] 

BILLING CODE 4910–13–P 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Part 275 

[Release No. IA–3128; File No. S7–23–07] 

RIN 3235–AJ96 

Principal Trades with Certain Advisory 

Clients 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Temporary 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 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 

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 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 

persons.4 We intend to deliver the 

report concerning this study, as required 

by the Dodd-Frank 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 

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.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 

our proposal prior to the expiration of 

the comment period.8 Six of these 

commenters generally supported 


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Federal Register / Vol. 75, No. 250 / Thursday, December 30, 2010 / Rules and Regulations 82237 

9See Bank of America Letter; CFA Letter; PIABA 

Letter; Pickard and Djinis Letter; SIFMA Letter; 

Winslow, Evans & Crocker Letter. We note that 

PIABA supported a one-year extension. 

10See Fiduciary360 Letter; NAPFA Letter. 

11See Frankel Letter; Rhoades Letter. 

12See Proposing Release, Section II. 

13See Bank of America Letter; CFA Letter; PIABA 

Letter; Pickard and Djinis Letter; SIFMA Letter; 

Winslow, Evans & Crocker Letter. 14See Fiduciary360 Letter; NAPFA Letter. 

15See Bank of America Letter; CFA Letter; SIFMA 

Letter. 

16See Bank of America Letter; SIFMA Letter. 

17See Bank of America Letter; SIFMA Letter; 

Winslow, Evans & Crocker Letter. 

18See 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. 

19See 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. 

20See Fiduciary360 Letter. 

21As 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. 

22See 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 brokerdealers and investment advisers.’’). 

23Although some of the commenters suggested 

that the discussion of the staff’s observations in the 

Proposing Release was not robust enough, we 

Continued 

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 DoddFrank Act and consider more broadly 

the regulatory requirements applicable 

to broker-dealers and investment 

advisers.12 As part of our broader 

consideration of the regulatory 

requirements applicable to brokerdealers 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 brokerdealers and investment advisers prior to 

the rule’s expiration. 

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 brokerdealers 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 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 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 


srobinson on DSKHWCL6B1PROD with RULES
82238 Federal Register / Vol. 75, No. 250 / Thursday, December 30, 2010 / Rules and Regulations 

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. 

24One 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. 

25See Pickard and Djinis Letter. 

26See NAPFA Letter. 

27See 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.’’). 

28See Bank of America Letter; SIFMA Letter; 

Winslow, Evans & Crocker Letter. 

29See SIFMA Letter. 

30See Bank of America Letter; Fiduciary360 

Letter; Winslow, Evans & Crocker Letter; PIABA 

Letter. 

31See Bank of America Letter; Winslow, Evans & 

Crocker Letter; Pickard and Djinis Letter. 

32See Winslow, Evans & Crocker Letter. 

33See PIABA Letter. 

34See id. 

35See NAPFA Letter; Fiduciary360 Letter. 

36See 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. 

37See CFA Letter; Fiduciary360 Letter; Frankel 

Letter; NAPFA Letter; Pickard and Djinis Letter; 

Rhoades Letter; SIFMA Letter. 

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

39 Id. 

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. 

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

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 brokerdealers.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 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 brokerdealers 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 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 


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Federal Register / Vol. 75, No. 250 / Thursday, December 30, 2010 / Rules and Regulations 82239 

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

41See 2007 Principal Trade Rule Release, Section 

V.B&C. 

42See 2009 Extension Release, Section IV; 

Proposing Release, Section IV. 

43See 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. 

45See 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 nondiscretionary 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). 

46See 2007 Principal Trade Rule Release, Section 

VI.C; 2009 Extension Release, Section V; Proposing 

Release, Section V. 

47See 2007 Principal Trade Rule Release, Section 

VI.D; 2009 Extension Release, Section V; Proposing 

Release, Section V. 

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. 

49See Proposing Release, Section V. 

50See Winslow, Evans & Crocker Letter (‘‘We do, 

however, feel that extending the temporary rule is 

in the best interest of investors but think that doing 

Continued 

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 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 feebased brokerage accounts. A resulting 

second benefit of the rule is that nondiscretionary 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 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, non-discretionary advisory clients 

who have had access to certain 

securities because of their advisers’ 

reliance on the rule to trade on a 

principal basis will continue to have 

access to those securities without 

disruption. 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, 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 brokerdealers 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 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


srobinson on DSKHWCL6B1PROD with RULES
82240 Federal Register / Vol. 75, No. 250 / Thursday, December 30, 2010 / Rules and Regulations 

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). 

51See 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.’’). 

52 15 U.S.C. 80b–2(c). 

53See 2007 Principal Trade Rule Release, Section 

VII; 2009 Extension Release, Section VI; Proposing 

Release, Section VI. 

54See 2009 Extension Release, Section VI; 

Proposing Release, Section VI; Comment Letter of 

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

55See 2009 Extension Release, Section VI; 

Proposing Release, Section VI. 

56See NAPFA Letter. 

57See Proposing Release, Section VII. 

58See Winslow, Evans & Crocker Letter. 

59See id. 

60See 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.’’). 

61See 17 CFR 275.0–7. 

62 IARD data as of November 1, 2010. 

63See 2007 Principal Trade Rule Release, Section 

VIII.B. 

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 DoddFrank 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 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 

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.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 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; 55 however we intend to 

continue to evaluate these effects in 

connection with our broader 

consideration of the regulatory 

requirements applicable to brokerdealers and investment advisers. 

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 broker-dealers 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. 

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 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 


srobinson on DSKHWCL6B1PROD with RULES
Federal Register / Vol. 75, No. 250 / Thursday, December 30, 2010 / Rules and Regulations 82241 

64 IARD data as of November 1, 2010. 

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

66See 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)). 

both investment advisers and brokerdealers) 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 make certain disclosures 

to clients on a prospective, transactionby-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 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 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 

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.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. 

* * * * * 

§ 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 28, 2010. 

By the Commission. 

Elizabeth M. Murphy, 

Secretary. 

[FR Doc. 2010–33077 Filed 12–28–10; 4:15 pm] 

BILLING CODE 8011–01–P 

DEPARTMENT OF HOMELAND 

SECURITY 

U.S. Customs and Border Protection 

19 CFR Part 141 

[USCBP–2008–0062; CBP Dec. 10–33] 

RIN 1515–AD61 (Formerly 1505–AB96) 

Technical Correction: Completion of 

Entry and Entry Summary— 

Declaration of Value 

AGENCY: Customs and Border Protection, 

Department of Homeland Security. 

ACTION: Final rule. 

SUMMARY: Customs and Border 

Protection (CBP) periodically reviews its 

regulations to ensure that they are 

current, correct, and consistent. As a 

result of this review process, CBP has 

determined that a correction to part 141 

of title 19 of the CBP Regulations (19 

CFR part 141) is necessary to reflect that 

the underlying statutory authority for 

§ 141.61(g) has expired and that this 

regulation is no longer necessary. 


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