Federal Register / Vol. 63, No. 141 /Thursday, July 23, 1998 /Rules and Regulations 39505

1 15 U.S.C. 80b–1, et seq. (the ‘‘Advisers Act’’).

2Section 206(3) expressly excludes any

transaction between a broker or dealer and its

customer if the broker or dealer is not also acting

as an investment adviser in relation to the

transaction. 15 U.S.C. 80b–6(3).

3We and our staff have applied Section 206(3) to

apply not only to principal and agency transactions

engaged in or effected by any adviser, but also to

certain situations in which an adviser causes a

client to enter into a principal or agency transaction

that is effected by a broker-dealer that controls, is

controlled by, or is under common control with, the

adviser. Staff no-action letter, Hartzmark & Co.

(available Nov. 11, 1973) (applying Section 206(3)

when an adviser effects transactions through its

broker-dealer parent). See also Advisers Act Release

No. 589 (June 1, 1977) [42 FR 29300] (‘‘Release No.

589’’) (when adopting Rule 206(3)-2 under the

Advisers Act, the non-exclusive safe harbor

available for certain agency transactions, we

expanded the rule to cover transactions effected

through such affiliated broker-dealers).

4See Investment Trusts and Investment

Companies: Hearings on S. 3580 Before the

Subcomm. of the Comm. on Banking and Currency,

76th Cong., 3d Sess. 320 (1940) (statement of David

Schenker, Chief Counsel, Securities and Exchange

Commission Investment Trust Study) (hereafter

‘‘Senate Hearings’’) (‘‘I think it is the Commission’s

recommendation that all self-dealing between the

investment counselor and the client should be

stopped.’’).

DEPARTMENT OF COMMERCE

Bureau of Export Administration

15 CFR Part 746

[Docket No. 980522136–8136–01]

RIN 0694–AB69

Exports to the Federal Republic of

Yugoslavia (Serbia and Montenegro);

Imposition of Foreign Policy Controls;

Correction

AGENCY: Bureau of Export

Administration, Commerce.

ACTION: Final rule; correction.

SUMMARY: On July 14, 1998, (63 FR

37767) the Bureau of Export

Administration published a final rule

implementing Executive Order 12918 of

May 26, 1994 and the United Nations

Security Council Resolution 1160 of

March 31, 1998, which directs member

countries to ban the supply of arms and

arms-related items to the Federal

Republic of Yugoslavia (Serbia and

Montenegro). Specifically, the July 14

rule amended the Export

Administration Regulations by

specifying that exports to the Federal

Republic of Yugoslavia (Serbia and

Montenegro) of arms-related items will

be denied. In addition, the July 14 rule

imposed a new license requirement and

a policy of denial for certain additional

items to the Federal Republic of

Yugoslavia (Serbia and Montenegro),

including bulletproof vests, water

cannon, and certain explosives

equipment.

This document corrects an

inadvertent error in codification related

to controls on the Federal Republic of

Yugoslavia (Serbia and Montenegro).

EFFECTIVE DATE: This correction is

effective July 14, 1998.

FOR FURTHER INFORMATION CONTACT:

Patricia Muldonian, Regulatory Policy

Division, Bureau of Export

Administration, Telephone: (202) 482–

2440.

SUPPLEMENTARY INFORMATION: In final

rule of July 14, 1998 (63 FR 37767), FR

Doc. 98–18417, make the following

corrections to part 746:

PART 746—[CORRECTED]

§ 746.9 [Corrected]

1. On page 37769, in the first column,

under § 746.9, correct the first line of

paragraph (a) to read ‘‘(a) License

requirements. (1) Scope. Under’’.

Dated: July 15, 1998.

Eileen M. Albanese,

Director, Office of Exporter Services.

[FR Doc. 98–19502 Filed 7–22–98; 8:45 am]

BILLING CODE 3510–33–P

SECURITIES AND EXCHANGE

COMMISSION

17 CFR Part 276

[Release No. IA–1732]

Interpretation of Section 206(3) of the

Investment Advisers Act of 1940

AGENCY: Securities and Exchange

Commission.

ACTION: Interpretation.

SUMMARY: The Securities and Exchange

Commission (‘‘Commission’’) is

publishing two interpretive positions

under Section 206(3) of the Investment

Advisers Act of 1940. Section 206(3)

prohibits any investment adviser from

engaging in or effecting a transaction on

behalf of a client while acting either as

principal for its own account, or as

broker for a person other than the client,

without disclosing in writing to the

client, before the completion of the

transaction, the adviser’s role in the

transaction and obtaining the client’s

consent. The first interpretive position

identifies the points at which an adviser

may obtain its client’s consent to a

principal or agency transaction. The

second interpretive position identifies

certain transactions for which an

adviser would not be acting as broker

within the meaning of Section 206(3).

DATES: Release No. IA–1732 is added to

the list in Part 276 as of July 17, 1998.

The first interpretive position in Release

No. IA–1732 is effective on September

21, 1998. The second interpretive

position in Release No. IA–1732 is

effective on July 23, 1998.

FOR FURTHER INFORMATION CONTACT:

Douglas Scheidt, Associate Director and

Chief Counsel, Karrie McMillan,

Assistant Chief Counsel, or Eileen

Smiley, Senior Counsel, 202/942–0660,

Mail Stop 5–6, Division of Investment

Management, 450 Fifth Street, N.W.,

Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION:

I. Introduction

Section 206(3) of the Investment

Advisers Act of 1940 1 makes it

unlawful for any investment adviser,

directly or indirectly ‘‘acting as

principal for his own account,

knowingly to sell any security to or

purchase any security from a client, or

acting as broker for a person other than

such client, knowingly to effect any sale

or purchase of any security for the

account of such client, without

disclosing to such client in writing

before the completion of such

transaction the capacity in which he is

acting and obtaining the consent of the

client to such transaction.’’ 2 Section

206(3) thus imposes a prior consent

requirement on any adviser that acts as

principal in a transaction with a client,

or that acts as broker (that is, an agent)

in connection with a transaction for, or

on behalf of, a client.3

In a principal transaction, an adviser,

acting for its own account, buys a

security from, or sells a security to, the

account of a client. In an agency

transaction, an adviser arranges a

transaction between different advisory

clients or between a brokerage customer

and an advisory client. Advisory clients

can benefit from both types of

transactions, depending on the

circumstances, by obtaining a more

favorable transaction price for the

securities being purchased or sold than

otherwise available. Principal and

agency transactions, however, also may

pose the potential for conflicts between

the interests of the adviser and those of

the client.

The wording and legislative history of

Section 206(3) indicate that Congress

recognized that both principal and

agency transactions create the potential

for advisers to engage in self-dealing.4

Principal transactions, in particular,

may lead to abuses such as price

manipulation or the placing of