[Federal Register Volume 79, Number 246 (Tuesday, December 23, 2014)]
[Rules and Regulations]
[Pages 76880-76888]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-29975]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 275

[Release No. IA-3984; File No. S7-23-07]
RIN 3235-AL56


Temporary Rule Regarding Principal Trades With Certain Advisory 
Clients

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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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 that 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, 2014 to December 31, 2016.

DATES: The amendments in this document are effective December 30, 2014 
and the expiration date for 17 CFR 275.206(3)-3T is extended to 
December 31, 2016.

FOR FURTHER INFORMATION CONTACT: Melissa S. Gainor, Senior Counsel, 
Sarah A. Buescher, Branch Chief, or Daniel S. Kahl, Assistant Director, 
at (202) 551-6787 or <a href="/cdn-cgi/l/email-protection#d39a92a1a6bfb6a093a0b6b0fdb4bca5"><span class="__cf_email__" data-cfemail="94ddd5e6e1f8f1e7d4e7f1f7baf3fbe2">[email protected]</span></a>, Investment Adviser Regulation 
Office, Division of Investment Management, U.S. Securities and Exchange 
Commission, 100 F Street, NE., Washington, DC 20549-8549.

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, 2014 
to December 31, 2016.

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 that 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 non-discretionary advisory clients, following 
the decision in Financial Planning Association v. SEC,\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 terms, while protecting clients from 
conflicts of interest as a result of such transactions.\3\ In December 
2009, 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 date by one year to December 31, 2010.\4\ 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.\5\ In both December 2010 and December 2012, we 
further extended the rule's sunset date, in each case for an additional 
two-year period.\6\ We deferred final action on rule 206(3)-3T in 2010 
in order to complete a study required by section 913 of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act (the ``Dodd-Frank 
Act'').\7\ In 2012, we deferred final action on rule 206(3)-3T to 
further consider the findings, conclusions, and recommendations of the 
913 Study and the comments we had received from interested parties.\8\ 
In connection with each extension, we noted that our consideration of 
the regulatory requirements applicable to broker-dealers and investment 
advisers was ongoing and that an extension would allow the Commission 
to consider more broadly the regulatory requirements applicable to 
broker-dealers and investment advisers, including whether rule 206(3)-
3T should be substantively modified, supplanted, or permitted to 
sunset.\9\
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    \1\ Rule 206(3)-3T [17 CFR 275.206(3)-3T]. All references to 
rule 206(3)-3T and the various sections thereof in this release are 
to 17 CFR 275.206(3)-3T and its corresponding sections. See also 
Temporary Rule Regarding Principal Trades with Certain Advisory 
Clients, Investment Advisers Act Release No. 2653 (Sep. 24, 2007) 
[72 FR 55022 (Sep. 28, 2007)] (``2007 Principal Trade Rule 
Release'').
    \2\ 482 F.3d 481 (D.C. Cir. 2007) (vacating rule 202(a)(11)-1 
under the Advisers Act).
    \3\ See 2007 Principal Trade Rule Release, Sections I and VI.C.
    \4\ See Temporary Rule Regarding Principal Trades with Certain 
Advisory Clients, Investment Advisers Act Release No. 2965 (Dec. 23, 
2009) [74 FR 69009 (Dec. 30, 2009)] (``2009 Extension Release''); 
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).
    \5\ See 2009 Extension Release, Section II.c.
    \6\ See Temporary Rule Regarding Principal Trades with Certain 
Advisory Clients, Investment Advisers Act Release No. 3118 (Dec. 1, 
2010) [75 FR 75650 (Dec. 6, 2010)] (proposing a two-year extension 
of rule 206(3)-3T's sunset provision) (``2010 Extension Proposing 
Release''); Temporary Rule Regarding Principal Trades with Certain 
Advisory Clients, Investment Advisers Act Release No. 3128 (Dec. 28, 
2010) [75 FR 82236 (Dec. 30, 2010)] (extending rule 206(3)-3T's 
sunset provision from December 31, 2010 to December 31, 2012) 
(``2010 Extension Release''); Temporary Rule Regarding Principal 
Trades with Certain Advisory Clients, Investment Advisers Act 
Release No. 3483 (Oct. 9, 2012) [77 FR 62185 (Oct. 12, 2012)] 
(proposing a two-year extension of rule 206(3)-3T's sunset 
provision); Temporary Rule Regarding Principal Trades with Certain 
Advisory Clients, Investment Advisers Act Release No. 3522 (Dec. 20, 
2012) [77 FR 76854 (Dec. 31, 2012)] (extending rule 206(3)-3T's 
sunset provision from December 31, 2012 to December 31, 2014) 
(``2012 Extension Release'').
    \7\ Public Law 111-203, 124 Stat. 1376 (2010). Under section 913 
of the Dodd-Frank Act, we were required to conduct a study and 
provide a report to Congress concerning the obligations of broker-
dealers and investment advisers, including standards of care 
applicable to those intermediaries and their associated persons. 
Section 913 also authorizes us to promulgate rules concerning 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, taking into account the findings, conclusions, and 
recommendations of the study.
    The study mandated by section 913 of the Dodd-Frank Act was 
prepared by the staff and delivered to Congress on January 21, 2011. 
See Study on Investment Advisers and Broker-Dealers (``913 Study'') 
(Jan. 21, 2011), available at http://www.sec.gov/news/studies/2011/913studyfinal.pdf. For a discussion regarding principal trading, see 
section IV.C.1.(b) of the 913 Study. See also Commissioners Kathleen 
L. Casey and Troy A. Paredes, Statement by SEC Commissioners: 
Statement Regarding Study on Investment Advisers and Broker-Dealers 
(Jan. 21, 2011), available at http://www.sec.gov/news/speech/2011/spch012211klctap.htm (opposing the release of the 913 Study to 
Congress and stating that more rigorous analysis is required before 
the Commission engages in any follow-on rulemaking).
    \8\ See 2012 Extension Release, Section II.
    \9\ See id.; 2010 Extension Release, Section II.

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[[Page 76881]]

    We have continued to consider the regulatory requirements 
applicable to broker-dealers and investment advisers. In 2013, we 
issued a request for data and other information, including quantitative 
data and economic analysis, relating to the benefits and costs that 
could result from alternative approaches regarding the standards of 
conduct and other obligations of broker-dealers and investment 
advisers.\10\ The staff has received over 200 comment letters in 
response to the Request, several of which discussed rule 206(3)-3T, and 
Commissioners and the staff have held numerous meetings with interested 
parties.\11\
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    \10\ Duties of Brokers, Dealers, and Investment Advisers, 
Investment Advisers Act Release No. 3558 (Mar. 1, 2013) [78 FR 14848 
(Mar. 7, 2013)] (the ``Request'').
    \11\ See Comments on Study Regarding Obligations of Brokers, 
Dealers, and Investment Advisers, File No. 4-606, available at 
http://sec.gov/comments/4-606/4-606.shtml. See e.g., Comment Letter 
of North American Securities Administrators Association, Inc. (Jul. 
5, 2013) (``[T]he Commission should consider SEC Rule 206(3)-3T as 
part of future fiduciary standard rulemaking.'').
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    On August 12, 2014, we proposed to extend the date on which rule 
206(3)-3T will sunset for a limited amount of time, from December 31, 
2014 to December 31, 2016.\12\ We received nine comment letters 
addressing our proposal.\13\ Seven of these commenters generally 
supported extending rule 206(3)-3T for at least two years,\14\ while 
two commenters opposed a two-year extension.\15\ The comments we 
received on our proposal are discussed below. After considering each of 
the comments, we are extending the rule's sunset date by two years to 
December 31, 2016, as proposed.
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    \12\ See Temporary Rule Regarding Principal Trades with Certain 
Advisory Clients, Investment Advisers Act Release No. 3893 (Aug. 12, 
2014), [79 FR 48709 (Aug. 18, 2014)] (``Proposing Release'').
    \13\ See Comment Letter of Chris Barnard (Aug. 22, 2014) 
(``Barnard Letter''); Comment Letter of Better Markets, Inc. (Sept. 
17, 2014) (``Better Markets Letter''); Comment Letter of Consumer 
Federation of America (Sept. 17, 2014) (``Consumer Federation 
Letter''); Comment Letter of Financial Services Institute (Sept. 17, 
2014) (``FSI Letter''); Comment Letter of Financial Services 
Roundtable (Sept. 16, 2014) (``FSR Letter''); Comment Letter of 
Jeffrey W. Lynn (Aug. 24, 2014) (``Lynn Letter''); Comment Letter of 
Thomas Michael Manis (Aug. 21, 2014) (``Manis Letter''); Comment 
Letter of Securities Industry and Financial Markets Association 
(``SIFMA'') (Sept. 17, 2014) (``SIFMA 2014 Letter''); Comment Letter 
of Wells Fargo Advisors, LLC (Sept. 17, 2014) (``Wells Fargo 
Letter''). We received one comment letter that did not directly 
address the issues in the proposal. See Comment Letter of J. Wayne-
Lynn (Sept. 3, 2014). We also received one comment letter discussing 
Title IX of the Dodd-Frank Act (including section 913), but not 
specifically addressing the extension of the rule or principal 
trading. See Comment Letter of Norman B. Arnoff, Esq. and Paul A. 
Immerman, Esq. (Oct. 26, 2014).
    \14\ See Barnard Letter; FSI Letter; FSR Letter; Lynn Letter; 
Manis Letter; SIFMA 2014 Letter; Wells Fargo Letter.
    \15\ See Better Markets Letter; Consumer Federation Letter.
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II. Discussion

    We are amending rule 206(3)-3T only to extend the rule's sunset 
date by two additional years.\16\ We are not adopting any substantive 
amendments to the rule at this time. Absent further action by the 
Commission, the rule would sunset on December 31, 2014. We are adopting 
this extension because, as we discussed in the Proposing Release, we 
continue to believe that 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, should be considered as part of our broader consideration of 
the regulatory requirements applicable to broker-dealers and investment 
advisers in connection with the Dodd-Frank Act.\17\
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    \16\ The rule includes a reference to an ``investment grade debt 
security,'' which is defined as ``a non-convertible debt security 
that, at the time of sale, is rated in one of the four highest 
rating categories of at least two nationally recognized statistical 
rating organizations (as defined in section 3(a)(62) of the Exchange 
Act).'' Rule 206(3)-3T(a)(2) and (c). Section 939A of the Dodd-Frank 
Act requires that we ``review any regulation issued by [us] that 
requires the use of an assessment of the credit-worthiness of a 
security or money market instrument; and any references to or 
requirements in such regulations regarding credit ratings.'' Once we 
have completed that review, the statute provides that we modify any 
regulations identified in our review to ``remove any reference to or 
requirement of reliance on credit ratings and to substitute in such 
regulations such standard of credit-worthiness'' as we determine 
appropriate. We believe that the credit rating requirement in the 
temporary rule would be better addressed after the Commission 
completes its review of the regulatory standards of conduct that 
apply to broker-dealers and investment advisers. See generally 
Report on Review of Reliance on Credit Ratings (July 21, 2011), 
available at http://www.sec.gov/news/studies/2011/939astudy.pdf 
(staff study reviewing the use of credit ratings in Commission 
regulations).
    \17\ See Proposing Release, Section II.
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    Section 913 of the Dodd-Frank Act authorizes us to promulgate rules 
concerning, among other things, the legal or regulatory standards of 
conduct for broker-dealers, investment advisers, and persons associated 
with these intermediaries when providing personalized investment advice 
about securities to retail customers. Since the completion of the 913 
Study in 2011, we have been considering the findings, conclusions, and 
recommendations of the study and the comments we have received from 
interested parties.\18\ The Commission and its staff have continued to 
evaluate options regarding regulatory requirements applicable to 
broker-dealers and investment advisers, taking into account the 913 
Study's recommendations, the views of investors and other interested 
market participants, potential economic and market impacts, and the 
information we received in response to the Request. Staff has also been 
conducting examinations of dual registrants and is assessing the impact 
to investors of the different supervisory structures and legal 
standards of conduct that govern the provision of brokerage and 
investment advisory services, which may help inform our 
considerations.\19\ Our consideration of the regulatory requirements 
applicable to broker-dealers and investment advisers is ongoing. We 
will not complete our consideration of these issues before December 31, 
2014, the current sunset date for rule 206(3)-3T.
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    \18\ Section 913(f) of the Dodd-Frank Act requires us to 
consider the 913 Study in any rulemaking authorized by that section 
of the Dodd-Frank Act. See also Comments on Study Regarding 
Obligations of Brokers, Dealers, and Investment Advisers, File No. 
4-606, available at http://sec.gov/comments/4-606/4-606.shtml.
    \19\ See National Exam Program, Office of Compliance Inspections 
and Examinations, Examination Priorities for 2014 (Jan. 9, 2014), 
available at http://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2014.pdf.
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    If we permit rule 206(3)-3T to sunset on December 31, 2014, after 
that date investment advisers registered with us as broker-dealers that 
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 provided by rule 206(3)-3T if they 
want to engage in principal trades with non-discretionary advisory 
account clients. This could limit the access of non-discretionary 
advisory clients of advisory firms that are registered with us as 
broker-dealers to certain securities.\20\ In addition, firms may be 
required to make substantial changes to their disclosure documents, 
client agreements, procedures, and systems.
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    \20\ For a discussion of the costs and benefits underlying rule 
206(3)-3T, see 2007 Principal Trade Rule Release, Section VI.C.
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    As noted above, seven commenters generally supported our proposal 
to extend rule 206(3)-3T, and two commenters opposed the two-year 
extension. Commenters who supported the extension cited the disruption 
to investors that would occur if the rule expired at this time, 
asserting that investors would lose access to the securities currently 
offered through principal trades, receive less favorable pricing on 
such securities, or be forced to open brokerage accounts if they wished 
to maintain access to certain

[[Page 76882]]

securities only available on a principal basis.\21\ Two commenters also 
stated that the expiration of rule 206(3)-3T would reduce execution 
quality for non-discretionary advisory account clients who would no 
longer have access to a firm's principal accounts.\22\ Some 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 operations, client relationships, systems, policies and 
procedures at substantial expense, without substantial benefits to 
investors.\23\
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    \21\ See e.g., FSR Letter (asserting that ``investors would be 
harmed'' if the rule were allowed to expire because investors would 
have limited access to certain securities); SIFMA 2014 Letter 
(noting that the rule benefits investors by ``allowing firms to 
offer investors a greater variety of securities from firm 
inventories, execute trades in such securities more quickly, and 
offer customers better prices on such securities''); Wells Fargo 
Letter (arguing that the expiration of rule 206(3)-3T would ``limit 
investor choice, negatively impact pricing and force clients to 
incur additional expenses to access the wider range of securities 
available through principal trading'').
    \22\ See FSR Letter; Wells Fargo Letter.
    \23\ See FSI Letter; FSR Letter; SIFMA 2014 Letter; Wells Fargo 
Letter.
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    Commenters supporting the extension agreed that extending the rule 
while the Commission conducted its review of the obligations of broker-
dealers and investment advisers would be the least disruptive 
option.\24\ However, several of these commenters questioned whether a 
two-year extension provided the Commission with sufficient time to 
complete its review and to engage in any subsequent Commission 
action.\25\ These commenters recommended that the Commission adopt rule 
206(3)-3T on a permanent basis or, at a minimum, that the Commission 
extend the rule for five years.\26\ Some commenters suggested that 
adopting the rule on a permanent basis or adopting a longer extension 
of the rule would also have the benefit of reducing uncertainty for 
investors and dual-registrant firms.\27\
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    \24\ See Barnard Letter; FSI Letter; FSR Letter; SIFMA 2014 
Letter; Wells Fargo Letter.
    \25\ See FSR Letter; SIFMA 2014 Letter; Wells Fargo Letter.
    \26\ See FSR Letter; SIFMA 2014 Letter; Wells Fargo Letter. See 
also FSI Letter (recommending that the Commission adopt rule 206(3)-
3T on a permanent basis as part of a harmonization of the regulatory 
requirements applicable to broker-dealers and investment advisers); 
Lynn Letter (questioning the temporary nature of the rule).
    \27\ See FSR Letter; SIFMA 2014 Letter.
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    Three commenters specifically addressed Commission consideration of 
requests for exemptive orders as an alternative means of compliance 
with section 206(3). These commenters strongly supported extending the 
rule instead of Commission consideration of requests for exemptive 
orders.\28\ Two commenters expressed concern about the potential 
inefficiency and uncertainty created by the need to submit individual 
requests for exemptive relief, and suggested that the Commission 
consider a request for class exemptive relief if the rule were allowed 
to sunset.\29\ One commenter urged the Commission to adopt a 
streamlined process for exemptive requests that closely tracks the 
procedures of the rule if the rule sunsets.\30\
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    \28\ See FSR Letter; SIFMA 2014 Letter; Wells Fargo Letter.
    \29\ See FSR Letter; SIFMA 2014 Letter.
    \30\ See Wells Fargo Letter.
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    Two commenters opposed extending the rule, arguing that the 
Commission should not premise an extension of the rule on the need to 
consider principal trading as part of the broader consideration of the 
obligations of broker-dealers and investment advisers when the 
Commission has not yet commenced any formal rulemaking under section 
913 of the Dodd-Frank Act.\31\ These commenters questioned whether the 
temporary rule provides adequate investor protection against abusive 
trading practices.\32\ In this regard, the commenters asserted that 
oral disclosure and consent may not promote informed investor decisions 
in light of the limitations of such disclosures.\33\ In addition, the 
commenters argued that there is no evidence that principal trades being 
conducted in accordance with the rule are being conducted in investors' 
best interests.\34\ One commenter also questioned whether the 
Commission had considered evidence that had emerged since the rule was 
first adopted in connection with the proposed extension.\35\
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    \31\ See Better Markets Letter; Consumer Federation Letter.
    \32\ See Better Markets Letter (discussing conflicts associated 
with principal trading and stating that ``it is likely that 
investors are often unaware of instances where principal trades with 
their brokers have caused harm, and these abuses go undetected''); 
Consumer Federation Letter (stating that today's market realities 
present ``more, and more complex, opportunities for principal 
trading abuses'' than dumping alone and suggesting that the 
Commission should update its understanding of these risks).
    \33\ See Better Markets Letter (``A client certainly will have 
an easier time deciding whether or not to participate in the 
principal transaction if it receives the details of the proposed 
trade in writing, rather than having heard them once orally.''); 
Consumer Federation Letter (arguing that the temporary rule 
``reflects an over-reliance on disclosure and fails to incorporate 
adequate measures to prevent principal trading abuses'').
    \34\ See id.
    \35\ See Consumer Federation Letter.
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    On balance, and after careful consideration of these comments, we 
conclude that extending the rule for two years is the most appropriate 
course of action at this time. First, with respect to investors, we 
agree with those commenters that supported extending the rule that 
permitting the rule to sunset before we complete our consideration of 
the regulatory requirements applicable to broker-dealers and investment 
advisers could produce substantial disruption for investors with 
advisory accounts serviced by firms relying on the rule.\36\ 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.\37\ We believe that rule 
206(3)-3T benefits investors because it provides them with greater 
access to a wider range of securities and includes provisions designed 
to protect non-discretionary advisory clients.\38\
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    \36\ See FSI Letter; FSR Letter; SIFMA 2014 Letter; Wells Fargo 
Letter.
    \37\ As previously discussed in prior releases, 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 trades through advisory accounts. See, e.g., 
2007 Principal Trade Rule Release, Section I.B; 2009 Extension 
Release, Section I; 2010 Extension Release, Section II. See also 
SIFMA 2014 Letter.
    \38\ Several commenters agreed that an extension of the rule 
would continue to benefit investors. See SIFMA 2014 Letter (``If the 
Rule were allowed to expire, most firms continue to report that they 
would in most cases be unable to comply with Section 206(3) of the 
Advisers Act . . . Thus, firms would be required to eliminate or 
greatly reduce their offering of principal trades through advisory 
accounts, to the detriment of investors.''); Wells Fargo Letter 
(``If [rule 206(3)-3T] sunsets on December 31, 2014, our clients who 
rely upon it will likely have access to a more limited universe of 
principal securities likely at higher prices.''). But see Better 
Markets Letter (contending that the Commission does not have the 
authority to promulgate the rule, in part, because it cannot make 
the necessary findings under section 206A). We disagree with this 
commenter. For the reasons stated in this release we continue to 
believe that the rule extension is necessary and appropriate in the 
public interest and consistent with the protection of investors and 
the purposes fairly intended by the policy and provisions of the 
Advisers Act.
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    We do not agree with commenters who suggest that the rule places 
undue reliance on disclosure and consent, particularly oral disclosure 
and consent, as a means of investor protection.\39\ Section 206(3) does 
not prohibit advisers from engaging in principal transactions, but 
rather prescribes a means by which an adviser must disclose and obtain 
the consent of its clients to the conflicts of interest

[[Page 76883]]

involved.\40\ In light of these serious conflicts of interest and a 
substantial risk that the proprietary interests of the adviser will 
prevail over those of its clients, rule 206(3)-3T provides advisers an 
alternative means to comply with the requirements of that section that 
is consistent with the purposes, and our prior interpretations of, 
section 206(3). The rule continues to provide the protection of 
transaction-by-transaction disclosure and consent, either orally or in 
writing, subject to several additional conditions designed to protect 
investors.\41\ For example, the rule requires an adviser to provide 
written, prospective disclosure regarding the conflicts arising from 
principal trades and to obtain written, revocable consent from the 
client prospectively authorizing the adviser to enter into principal 
transactions. An adviser is also required under rule 206(3)-3T to send 
a confirmation statement to the client for each principal trade, 
disclosing the capacity in which the adviser has acted and indicating 
that the client consented to the transaction. The written confirmation 
statement serves as a reminder to clients of each transaction that the 
adviser effects on a principal basis and that conflicts of interest are 
inherent in such transactions.\42\ In addition, the rule requires an 
adviser to deliver to the client an annual report itemizing principal 
transactions to ensure that clients receive a periodic record of 
principal trading activity in their accounts and to afford them the 
opportunity to assess the frequency with which their adviser engages in 
such trades.\43\
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    \39\ See Better Markets Letter; Consumer Federation Letter.
    \40\ In particular, section 206(3) requires an adviser acting as 
principal for its own account to disclose to an advisory client in 
writing before the completion of the transaction the capacity in 
which the adviser is acting and obtain the consent of the client to 
such transaction.
    \41\ See 2007 Principal Trade Rule Release, Section II.B. 
(expressing the belief that trade-by-trade disclosure and consent 
``continues to be important to alert clients to the potential for 
conflicted advice they may be receiving on individual 
transactions'').
    \42\ See 2007 Principal Trade Rule Release, Section II.B.
    \43\ See id.
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    Moreover, we note that the rule is limited to principal trades with 
non-discretionary advisory account clients.\44\ As previously stated, 
we are of the view that the risk of relaxing the procedural 
requirements of section 206(3) of the Advisers Act when a client has 
ceded substantial, if not complete, control over the account raises 
significant risks that the client will not be, or is not in a position 
to be, sufficiently involved in the management of the account to 
protect himself or herself from overreaching by the adviser.\45\
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    \44\ Specifically, rule 206(3)-3T applies to principal trades 
with respect to accounts over which the client has not granted 
investment discretion, ``except investment discretion granted by the 
advisory client on a temporary or limited basis.'' Rule 206(3)-
3T(a)(1).
    \45\ See 2007 Principal Trade Rule Release, Section II.B.
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    We believe that the requirements of rule 206(3)-3T, coupled with 
regulatory oversight, will adequately protect non-discretionary 
advisory clients for an additional limited period of time while we 
consider more broadly the regulatory requirements applicable to broker-
dealers and investment advisers.\46\ Since its adoption and throughout 
the period of the extension, the staff has examined and will continue 
to examine firms that engage in principal transactions and will take 
appropriate action to help ensure that firms are complying with section 
206(3) or rule 206(3)-3T (as applicable), including possible 
enforcement action.\47\ Several recent cases demonstrate our commitment 
to enforcing firms' compliance with these requirements when they engage 
in principal transactions with clients.\48\ As noted above, staff has 
also been conducting examinations of dual registrants and is assessing 
the impact to investors of the different supervisory structures and 
legal standards of conduct that govern the provision of brokerage and 
investment advisory services, which may help inform our 
considerations.\49\
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    \46\ In addition, rule 206(3)-3T(b) provides that the rule does 
not relieve an investment adviser from acting in the best interests 
of its clients, or from any obligation that may be imposed by 
sections 206(1) or (2) of the Advisers Act or any other applicable 
provisions of the federal securities laws. Further, the rule 
requires that advisers seeking to rely on the rule also be 
registered with the Commission as broker-dealers and that each 
account for which the investment adviser relies on this rule be a 
brokerage account subject to the Exchange Act, and the rules 
thereunder, and the rules of the self-regulatory organization(s) of 
which the broker-dealer is a member. Rule 206(3)-3T(a)(7).
    \47\ In the 2010 Extension Proposing Release, we discussed 
certain compliance issues identified by the Office of Compliance 
Inspections and Examinations. See 2010 Extension Proposing Release, 
Section II. One matter identified in the staff's review resulted in 
a settlement of an enforcement proceeding and other matters continue 
to be reviewed by the staff. See In the Matter of Feltl & Company, 
Inc., Investment Advisers Act Release No. 3325 (Nov. 28, 2011) 
(settled order finding, among other things, violations of section 
206(3) of the Advisers Act for certain principal transactions and 
section 206(4) of the Advisers Act and rule 206(4)-7 thereunder for 
failure to adopt written policies and procedures reasonably designed 
to prevent violations of the Advisers Act and its rules).
    \48\ See In the Matter of Barclays Capital Inc., Investment 
Advisers Act Release No. 3929 (Sept. 23, 2014) (settled order 
finding, among other things, violations of section 206(3) of the 
Advisers Act for engaging in transactions with advisory clients on a 
principal basis without providing prior written disclosure to, or 
obtaining consent from, the clients); In the Matter of Strategic 
Capital Group LLC and N. Gary Price, Investment Advisers Act Release 
No. 3924 (Sept. 18, 2014) (settled order finding, among other 
things, violations of section 206(3) of the Advisers Act for 
engaging in transactions with advisory clients on a principal basis 
through an affiliated broker-dealer, without providing prior written 
disclosure to, or obtaining consent from, the clients); In the 
Matter of Dominick & Dominick LLC and Robert X. Reilly, Investment 
Advisers Act Release No. 3881 (July 28, 2014) (settled order 
finding, among other things, violations of section 206(3) of the 
Advisers Act for engaging in transactions with advisory clients on a 
principal basis without obtaining client consent before completing 
the transactions); In the Matter of Paradigm Capital Management, 
Inc. and Candace King Weir, Investment Advisers Act Release No. 3857 
(June 16, 2014) (settled order finding, among other things, 
violations of section 206(3) of the Advisers Act for engaging in 
principal transactions with a hedge fund client through an 
affiliated broker-dealer without providing effective disclosure to, 
or obtaining consent from, the fund).
    \49\ See supra note 19 and accompanying text.
---------------------------------------------------------------------------

    We have also obtained information regarding principal trading 
through other means. For example, as noted in the Proposing Release, 
examination staff also requested and received materials from a sample 
of dual registrants in 2014 to observe the use of the rule by these 
firms.\50\ This examination showed that a number of the firms that were 
contacted by staff relied on the rule and that those firms had adopted 
written policies and procedures under rule 206(4)-7 that are designed 
to comply with the requirements of the temporary rule.\51\ Based on the 
review, it appeared to the staff that the firms relying on the rule had 
processes in place for the purpose of effecting principal transactions 
in compliance with the requirements of the temporary rule.
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    \50\ Staff identified a representative sample set of dual 
registrants based on Form ADV data, including firm disclosures on 
Form ADV Part 2A, and requested materials from the firms that 
included compliance policies and procedures, sample disclosures, and 
data regarding the firm's principal transactions with advisory 
accounts.
    \51\ 17 CFR 275.206(4)-7. See also 2007 Principal Trade Rule 
Release (noting that 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).
---------------------------------------------------------------------------

    We continue to believe, on balance, that the disruption of allowing 
the rule to expire is unwarranted as the Commission is engaging in a 
comprehensive review process that may ultimately produce different 
regulatory requirements.\52\ This disruption will be avoided if the 
rule remains available while the staff and Commission continue to 
review and consider the regulatory requirements applicable to broker-
dealers and investment advisers.
---------------------------------------------------------------------------

    \52\ See FSI Letter; FSR Letter; SIFMA 2014 Letter; Wells Fargo 
Letter.
---------------------------------------------------------------------------

    For the reasons discussed above, we believe that the rule's sunset 
date

[[Page 76884]]

should be extended for a limited period of time.\53\ That period of 
time must be long enough to permit us to consider any rulemaking 
prompted by our broader review of regulatory requirements applicable to 
investment advisers and broker-dealers. The Commission and its staff 
have continued to focus on evaluating options regarding regulatory 
requirements applicable to broker-dealers and investment advisers. That 
review is ongoing. We continue to believe that two years provides us 
sufficient time to act regarding our broader review, while also 
providing an appropriate balance that addresses commenters' concerns 
regarding non-discretionary advisory clients' continued access to 
certain securities and any new investor protection concerns that we may 
identify through our examination program or otherwise.
---------------------------------------------------------------------------

    \53\ See Proposing Release, Section II.
---------------------------------------------------------------------------

III. Certain Administrative Law Matters

    The amendment to rule 206(3)-3T is effective on December 30, 2014. 
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.\54\ 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.\55\ Rule 206(3)-3T is a rule that recognizes an exemption 
and relieves a restriction and in part has interpretive aspects.
---------------------------------------------------------------------------

    \54\ 5 U.S.C. 553(d).
    \55\ Id.
---------------------------------------------------------------------------

IV. Paperwork Reduction Act

    Rule 206(3)-3T contains ``collection of information'' requirements 
within the meaning of the Paperwork Reduction Act of 1995.\56\ The 
Office of Management and Budget (``OMB'') last approved the collection 
of information with an expiration date of July 31, 2017. 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 Proposing Release solicited comments on 
our PRA estimates, but we did not receive comment on them.\57\
---------------------------------------------------------------------------

    \56\ 44 U.S.C. 3501 et seq.
    \57\ See Proposing Release, Section IV.
---------------------------------------------------------------------------

    The amendment to the rule we are adopting today--to extend rule 
206(3)-3T's sunset date for two years--does not affect the current 
annual aggregate estimated hour burden of 139,358 hours.\58\ Therefore, 
we are not revising the Paperwork Reduction Act burden and cost 
estimates submitted to OMB as a result of this amendment.
---------------------------------------------------------------------------

    \58\ See Proposed Collection; Comment Request, 78 FR 72932 (Dec. 
4, 2013); Submission for OMB Review; Comment Request, 79 FR 7481 
(Feb. 7, 2014).
---------------------------------------------------------------------------

V. Economic Analysis

A. Introduction

    The Commission is sensitive to the economic effects, including the 
benefits and costs and the effects on efficiency, competition, and 
capital formation, that will result from extending rule 206(3)-3T's 
sunset date for two years.\59\ The economic effects considered in 
adopting this extension are discussed below.
---------------------------------------------------------------------------

    \59\ 15 U.S.C. 80b-2(c). 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.
---------------------------------------------------------------------------

    Rule 206(3)-3T provides an alternative means for investment 
advisers that are registered with the Commission 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 their non-
discretionary advisory clients. Other than extending the rule's sunset 
date for two additional years, we are not modifying the rule from its 
current form. We are extending rule 206(3)-3T in its current form to 
avoid disruption to firms and clients that rely on the rule while the 
Commission continues its ongoing consideration of the regulatory 
requirements applicable to broker-dealers and investment advisers and 
the recommendations from the 913 Study. In particular, extending the 
current rule will permit firms to continue to offer, and clients to 
have access to, certain securities on a principal basis without being 
required to restructure their operations and client relationships, 
adjust to a new set of rules, or abandon the operational systems 
established to comply with the current rule--potentially only to have 
to do so again when the rule expires or is modified, and once more if 
the Commission adopts a new approach to principal trading in connection 
with the broader consideration of the regulatory requirements 
applicable to broker-dealers and investment advisers. We previously 
considered and discussed the economic effects of rule 206(3)-3T in its 
current form in the 2007 Principal Trade Rule Release, the 2009 
Extension Release, the 2010 Extension Release, and the 2012 Extension 
Release.\60\
---------------------------------------------------------------------------

    \60\ See 2007 Principal Trade Rule Release, Sections VI-VII; 
2009 Extension Release, Sections V-VI; 2010 Extension Release, 
Sections V-VI; 2012 Extension Release, Sections V-VI.
---------------------------------------------------------------------------

    At the outset, the Commission notes that, where possible, it has 
sought to quantify the costs, benefits, and effects on efficiency, 
competition, and capital formation expected to result from extending 
rule 206(3)-3T and its reasonable alternatives. In many cases, however, 
the Commission is unable to quantify the economic effects because it 
lacks the information necessary to provide a reasonable estimate.\61\ 
The staff has also not found other quantitative data, including through 
examinations and comment letters, which impacts the discussion of 
economic effects in previous releases. We will continue to assess the 
rule's operation and impacts along with intervening developments during 
the period of the extension.
---------------------------------------------------------------------------

    \61\ In previous releases, the Commission has requested comment 
on the economic effects of rule 206(3)-3T, the economic effects of 
extending the rule, and the economic effects of alternatives. The 
Commission has not received comments providing quantitative data 
regarding the economic effects of extensions of rule 206(3)-3T or to 
alternatives of the rule.
---------------------------------------------------------------------------

    The temporary rule currently in effect serves as the economic 
baseline against which the costs and benefits, as well as the impact on 
efficiency, competition, and capital formation, of the amendment are 
discussed. The amendment, which will extend rule 206(3)-3T's sunset 
date by an additional two years, will affect investment advisers that 
are registered with the Commission as broker-dealers and engage in, or 
may consider engaging in, principal transactions with non-discretionary 
advisory clients, as well as the non-discretionary advisory clients of 
these firms that engage in, or may consider engaging in, principal 
transactions.
    Based on IARD data as of October 1, 2014, there are 96 dual 
registrants that may be relying on the rule; however, evidence suggests 
that the number of firms actually relying on the rule may be 
smaller.\62\ One commenter questioned

[[Page 76885]]

whether the Commission could justify extending rule 206(3)-3T when it 
did not have specific data regarding dual registrant firms' reliance on 
the rule.\63\ This commenter further suggested that without this and 
other data, the Commission could not confidently assert that the 
extension of the rule would have the economic effects set forth in the 
Proposing Release.\64\ We know from current and past comment letters, 
as well as our examination findings, that both large and small advisers 
have relied and continue to rely upon the rule since its implementation 
in 2007.\65\ Additionally, one comment letter to the Request provided 
survey results from a small sample of dual-registrant firms, showing 
that the firms engaged in a significant dollar amount of principal 
transactions in reliance on the rule in 2012.\66\ We believe that this 
background information provides evidence indicating a reliance on the 
rule by certain dual-registrant firms. Because the economic effects of 
extending the rule and its reasonable alternatives will depend on the 
extent to which eligible firms rely on the rule to engage in principal 
transactions with non-discretionary advisory clients, however, we 
recognize that the economic effects could vary significantly among 
firms and their clients.
---------------------------------------------------------------------------

    \62\ Based on IARD data as of October 1, 2014, there are 291 
SEC-registered advisers that are also registered as broker-dealers 
that have non-discretionary accounts who could potentially rely on 
the rule; however, only 96 of these dual registrants indicate they 
currently engage in principal transactions on Form ADV. The actual 
number of advisers that engage in principal transactions in reliance 
on the temporary rule is likely smaller. The staff's recent outreach 
to observe the use of the rule by firms found that some of the dual 
registrants in the sample, which was derived based on Form ADV data, 
did not rely on the rule.
    \63\ See Consumer Federation Letter.
    \64\ See id.
    \65\ See SIFMA 2014 Letter (stating that a significant number of 
SIFMA member firms continue to rely on rule 206(3)-3T); Wells Fargo 
Letter (noting that the firm managed approximately 275,000 non-
discretionary advisory accounts in which hundreds of principal 
trades are made on a monthly basis for the benefit of investors). 
Past comment letters have also stated that dual registrant firms 
rely on the rule. For example, SIFMA's 2012 comment letter included 
survey results from seven dual-registrant firms that, in the 
aggregate, manage over $325 billion of assets in over 1.1 million 
non-discretionary advisory accounts. The firms indicated that 
459,507 non-discretionary advisory accounts (with aggregate assets 
of over $125 billion) were eligible to engage in principal trading 
in reliance on the rule. These firms also indicated that, during 
2010-2012, the firms engaged in principal trades in reliance on rule 
206(3)-3T with respect to 106,682 accounts and executed an average 
of 12,009 principal trades per month in reliance on the rule. 
Comment Letter of SIFMA (Nov. 13, 2012).
    \66\ See Comment Letter of SIFMA (Jul. 5, 2013). Ten firms 
responded to SIFMA's survey and reported that they relied on the 
temporary rule for $8 billion in principal transactions across 
163,000 retail non-discretionary advisory accounts. In comparison, 
the ten firms engaged in $36 billion in principal transaction with 
498,000 retail advisory accounts under section 206(3) of the 
Advisers Act and $809 billion in principal transactions with 
2,480,000 retail brokerage accounts.
---------------------------------------------------------------------------

B. Analysis of the Extension and Alternatives

    As noted above, the temporary rule currently in effect serves as 
the economic baseline against which the costs and benefits, as well as 
the impact on efficiency, competition, and capital formation, of the 
amendment are discussed. Because the extension of the sunset date in 
the temporary rule that we are adopting today maintains the status quo, 
we do not expect additional costs or benefits to result from the 
extension. For the same reason, we also do not expect the extension to 
have additional effects on efficiency, competition, or capital 
formation. Extending the current rule will provide the Commission with 
additional time to consider principal trading as part of the broader 
consideration of the regulatory requirements applicable to broker-
dealers and investment advisers.
    Reasonable alternatives to extending the current rule that we 
considered include allowing the rule to expire, adopting the rule on a 
permanent basis, and extending the rule for a period other than two 
years. If the rule is allowed to expire, then an adviser that is 
registered as a broker-dealer would no longer have a lower cost and 
more efficient alternative to the requirements under section 206(3) of 
the Advisers Act like that provided by the temporary rule,\67\ and 
consequently non-discretionary advisory account clients could lose 
access to the principal accounts of firms that rely on the rule. As 
noted in the 2012 Extension Release, greater access to a wider range of 
securities may allow non-discretionary advisory clients to more 
efficiently allocate capital and, in the long term, the more efficient 
allocation of capital may lead to an increase in capital formation.\68\ 
If the rule expires, the loss of access by non-discretionary advisory 
clients to a wider range of securities would reduce the ability of 
these investors to efficiently allocate capital. A decrease in the 
ability of investors to efficiently allocate capital could reduce any 
resulting long-term gains to capital formation. Allowing the rule to 
expire also would reduce the ability of investors to choose between 
brokerage accounts and advisory accounts if the investor wishes to 
maintain access to securities held in firm principal accounts, and may 
force non-discretionary advisory account clients to bear the costs 
associated with transferring to brokerage accounts (or lose access to a 
firm's principal accounts). Firms may also bear the potentially 
substantial costs associated with restructuring their operations and 
client relationships or seeking exemptive relief from the provisions of 
section 206(3) of the Advisers Act.
---------------------------------------------------------------------------

    \67\ Section 206(3) of the Advisers Act requires an investment 
adviser to provide written conflict-of-interest disclosure 
describing its role as principal when transacting securities from 
its own account and obtain client consent prior to transaction 
completion. Rule 206(3)-3T provides a dual registrant firm the 
option of providing transaction-by-transaction disclosures verbally 
instead of in writing when engaging in principal transactions with 
non-discretionary advisory clients as long as the firm satisfies 
additional requirements before and after the transactions. 
Additional requirements of the temporary rule include the provision 
of a written prospective disclosure to clients describing the 
conflicts arising from principal transactions, acquisition of 
written revocable client consent prospectively authorizing such 
transactions, the provision of transaction-by-transaction 
confirmations, and the provision of annual reports itemizing the 
clients' principal transactions thereafter.
    \68\ 2012 Extension Release, Section V.B.
---------------------------------------------------------------------------

    If the rule is allowed to expire, and firms engage in principal 
transactions with advisory account clients pursuant to the requirements 
of section 206(3) of the Advisers Act, investors may be able to more 
fully evaluate the conflicts of the principal transactions at the time 
of trades. Two commenters who opposed the extension of rule 206(3)-3T 
questioned whether preserving investor access to securities sold on a 
principal basis is ultimately beneficial for investors given the 
presence of conflicts of interest and the potential for abuse including 
high trading costs.\69\ We believe that the requirements of rule 
206(3)-3T, coupled with regulatory oversight, will adequately protect 
non-discretionary advisory clients for the additional limited period of 
the extension. As noted above, section 206(3) does not prohibit 
advisers from engaging in principal transactions, but rather prescribes 
a means by which an adviser must disclose and obtain the consent of its 
clients to the conflicts of interest involved. Rule 206(3)-3T, which 
provides advisers an alternative means to comply with the requirements 
of that section, continues to provide the protection of transaction-by-
transaction disclosure and consent, either orally or in writing, 
subject to several conditions, including: (i) Written, prospective 
disclosure regarding the conflicts arising from principal trades; (ii) 
written, revocable consent from the client prospectively authorizing 
the adviser to enter into principal transactions; (iii) a written 
confirmation statement sent to the client for each principal trade, 
disclosing the capacity in which the adviser has acted and indicating 
that the client consented to the transaction; and (iv) an annual report 
itemizing principal transactions. We also continue to believe that non-
discretionary advisory client access to a wider range of securities is 
beneficial. Many clients wish to access securities held in the

[[Page 76886]]

inventory of a diversified broker-dealer and clients may wish to access 
these securities through their non-discretionary advisory accounts.\70\
---------------------------------------------------------------------------

    \69\ See Better Markets Letter; Consumer Federation Letter.
    \70\ See 2007 Principal Trade Rule Release, Section I.B.
---------------------------------------------------------------------------

    We previously received a comment suggesting that rule 206(3)-3T may 
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.'' \71\ While we 
understand the view that numerous and severe violations of trust could 
impede capital formation, the staff has not identified instances where 
an adviser has used the temporary rule to ``dump'' unmarketable 
securities or securities that the adviser believes may decline in value 
into an advisory account, a harm that section 206(3) and the conditions 
and limitations of rule 206(3)-3T are designed to redress.\72\ In 
addition, non-discretionary advisory account clients benefit from the 
protections of sales practice rules under the Securities Exchange Act 
of 1934 (the ``Exchange Act'') and of relevant self-regulatory 
organizations, and the fiduciary duty and other obligations imposed by 
the Advisers Act.
---------------------------------------------------------------------------

    \71\ See Comment Letter of National Association of Personal 
Financial Advisors (Dec. 20, 2010).
    \72\ See 2010 Extension Proposing Release, Section II (noting 
that the staff did not identify instances of ``dumping'' in 
connection with OCIE's examinations regarding compliance with the 
temporary rule).
---------------------------------------------------------------------------

    We also previously received comments opposing the limitation of the 
temporary rule to investment advisers that are registered with us 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 registered with us as broker-dealers.\73\ 
Commenters on the Proposing Release did not address this specific issue 
and 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 broker-dealers.\74\ We intend to continue to evaluate the 
effects of the rule on efficiency, competition, and capital formation 
in connection with our broader consideration of the regulatory 
requirements applicable to broker-dealers and investment advisers.
---------------------------------------------------------------------------

    \73\ See Comment Letter of the Financial Planning Association 
(Nov. 30, 2007); Comment Letter of the American Bar Association, 
section of Business Law's Committee on Federal Regulation of 
Securities (Apr. 18, 2008). See also 2009 Extension Release, Section 
VI.
    \74\ See 2009 Extension Release, Section VI; 2010 Extension 
Release, Section VI; 2012 Extension Release, Section V.
---------------------------------------------------------------------------

    If the Commission allowed the rule to expire, firms would no longer 
incur the costs associated with rule 206(3)-3T, including the 
operational costs associated with complying with the rule.\75\ 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-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 do 
not believe the extension we are adopting today affects the cost 
estimates associated with the rule.\76\ Furthermore, we believe that an 
eligible adviser that begins to rely on rule 206(3)-3T today would bear 
the same types of upfront and ongoing costs discussed in the 2007 
Principal Trade Rule Release.\77\
---------------------------------------------------------------------------

    \75\ See supra note 60.
    \76\ 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.
    \77\ See id.
---------------------------------------------------------------------------

    If the rule is adopted on a permanent basis, then there may be 
additional economic effects. We recognize that a temporary rule, by 
nature, creates uncertainty, which in turn, may result in a reduced 
ability of firms to coordinate and plan future business activities.\78\ 
The uncertainty with respect to rule 206(3)-3T would be reduced if the 
rule was adopted on a permanent basis or if the rule was allowed to 
expire. Nonetheless, we believe that it would not be appropriate to 
adopt the rule on a permanent basis (with any necessary substantive 
amendments) while consideration of the regulatory requirements 
applicable to broker-dealers and investment advisers is ongoing.
---------------------------------------------------------------------------

    \78\ See FSR Letter; SIFMA 2014 Letter; Wells Fargo Letter. We 
also received several comments in connection with prior extensions 
of the rule urging us to make the rule permanent to avoid such 
uncertainty. See e.g., Comment Letter of Winslow, Evans & Crocker 
(Dec. 8, 2010); Comment Letter of Bank of America (Dec. 20, 2010).
---------------------------------------------------------------------------

    Another alternative we considered was to extend the rule for a 
period other than two years. For example, extending the rule for 
greater than two years would provide the Commission with additional 
time to evaluate the impact of any potential rulemaking or other 
process that may emerge from the broader consideration of fiduciary 
obligations and other regulatory requirements applicable to broker-
dealers and investment advisers. Should our consideration of the 
fiduciary obligations and other regulatory requirements applicable to 
broker-dealers and investment advisers extend beyond the sunset date of 
the temporary rule, such a longer period may be appropriate. Several 
commenters specifically stated that the rule should be extended for at 
least five years to provide the Commission with sufficient time to 
complete its review of the obligations of broker-dealers and investment 
advisers and to engage in any subsequent Commission action.\79\ On 
balance, however, we continue to believe that the two-year extension of 
rule 206(3)-3T appropriately addresses the concerns of firms and 
clients relying on the rule while the Commission continues its ongoing 
consideration of the standards applicable to investment advisers and 
broker-dealers.
---------------------------------------------------------------------------

    \79\ See FSR Letter; SIFMA 2014 Letter; Wells Fargo Letter.
---------------------------------------------------------------------------

VI. Final Regulatory Flexibility Act 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.\80\
---------------------------------------------------------------------------

    \80\ See Proposing Release, Section VI.
---------------------------------------------------------------------------

A. Need for the Rule Amendment

    We are adopting an amendment to extend rule 206(3)-3T's sunset date 
for two years because we believe that it would not be appropriate to 
require firms relying on the rule to restructure their operations and 
client relationships before we complete our broader consideration of 
the regulatory requirements applicable to broker-dealers and investment 
advisers. The objective of the amendment to rule 206(3)-3T is to 
continue to provide an alternative method for investment advisers that 
are dually registered as broker-dealers to comply with section 206(3) 
of the Advisers Act when acting in a principal capacity with certain of 
their advisory clients. Absent further

[[Page 76887]]

action by the Commission, the rule will sunset on December 31, 2014.
    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 did not receive any comment letters related to our IRFA.

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 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 total assets of $5 million or more on the last day of 
its most recent fiscal year.\81\
---------------------------------------------------------------------------

    \81\ See 17 CFR 275.0-7.
---------------------------------------------------------------------------

    As noted in the Proposing Release, we estimated that as of June 1, 
2014, 464 SEC-registered investment advisers were small entities.\82\ 
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.\83\ We 
therefore estimated for purposes of the IRFA that 12 of these small 
entities (those that are both investment advisers and registered 
broker-dealers) could rely on rule 206(3)-3T.\84\ We did not receive 
any comments on these estimates.
---------------------------------------------------------------------------

    \82\ IARD data as of June 1, 2014. As of October 1, 2014, based 
on IARD data, we estimate that 480 SEC-registered investment 
advisers were small entities.
    \83\ See 2007 Principal Trade Rule Release, Section VIII.B.
    \84\ IARD data as of June 1, 2014. As of October 1, 2014, based 
on IARD data, we estimate that 7 of these small entities could rely 
on rule 206(3)-3T.
---------------------------------------------------------------------------

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, transaction-by-transaction and 
annual basis.
    Specifically, rule 206(3)-3T permits an adviser, with respect to a 
non-discretionary 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 a confirmation statement for 
each principal trade that discloses the capacity in which the adviser 
has acted and indicating that the client consented to the transaction; 
and (v) delivering to the client an annual report itemizing the 
principal transactions. Advisers are already required to communicate 
the content of many of the disclosures pursuant to their fiduciary 
obligations to clients. Other disclosures are already required by rules 
applicable to broker-dealers.
    Our amendment will only extend the rule's sunset date 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.\85\ 
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.
---------------------------------------------------------------------------

    \85\ See 5 U.S.C. 603(c).
---------------------------------------------------------------------------

    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 our goal 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 our approach to the rule to the same degree as other 
eligible advisers. The condition that advisers seeking to rely on the 
rule must also be registered with us 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 self-regulatory organization(s) of 
which the broker dealer 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.\86\ 
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.
---------------------------------------------------------------------------

    \86\ See 2007 Principal Trade Rule Release, Section II.B.7 
(noting commenters that objected to this condition as disadvantaging 
small broker-dealers (or affiliated but separate investment advisers 
and broker-dealers)).
---------------------------------------------------------------------------

VII. Statutory Authority

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

[[Page 76888]]

and 211(a) of the Advisers Act [15 U.S.C. 80b-6a and 80b-11(a)].

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

0
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)(11)(H), 80b-
2(a)(17), 80b-3, 80b-4, 80b-4a, 80b-6(4), 80b-6a, and 80b-11, unless 
otherwise noted.
* * * * *


Sec.  275.206(3)-3T  [Amended]

0
2. In Sec.  275.206(3)-3T, amend paragraph (d) by removing the words 
``December 31, 2014'' and adding in their place ``December 31, 2016.''

    By the Commission.

    Dated: December 17, 2014.
Brent J. Fields,
Secretary.
[FR Doc. 2014-29975 Filed 12-22-14; 8:45 am]
BILLING CODE 8011-01-P


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