76880 Federal Register / Vol. 79, No. 246 / Tuesday, December 23, 2014 / 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’’). 

2 482 F.3d 481 (D.C. Cir. 2007) (vacating rule 

202(a)(11)–1 under the Advisers Act). 

3See 2007 Principal Trade Rule Release, Sections 

I and VI.C. 

4See 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). 

5See 2009 Extension Release, Section II.c. 

6See 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’’). 

7Public 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 brokerdealers 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 brokerdealers, 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 DoddFrank 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). 

8See 2012 Extension Release, Section II. 9See id.; 2010 Extension Release, Section II. 

info/edgar.shtml. You can obtain paper 

copies of the EDGAR Filer Manual from 

the following address: Public Reference 

Room, U.S. Securities and Exchange 

Commission, 100 F Street NE., 

Washington, DC 20549, on official 

business days between the hours of 

10:00 a.m. and 3:00 p.m. You can also 

inspect the document at the National 

Archives and Records Administration 

(NARA). For information on the 

availability of this material at NARA, 

call 202–741–6030, or go to: http://www.

archives.gov/federal_register/code_of_

federal_regulations/ibr_locations.html. 

By the Commission. 

Dated: December 17, 2014. 

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2014–30041 Filed 12–22–14; 8:45 am] 

BILLING CODE 8011–01–P 

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. 

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 IArules@sec.gov, 

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 DoddFrank 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 brokerdealers 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


tkelley on DSK3SPTVN1PROD with RULES
Federal Register / Vol. 79, No. 246 / Tuesday, December 23, 2014 / Rules and Regulations 76881 

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’’). 

11See 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.’’). 

12See 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’’). 

13See 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 DoddFrank 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). 

14See Barnard Letter; FSI Letter; FSR Letter; Lynn 

Letter; Manis Letter; SIFMA 2014 Letter; Wells 

Fargo Letter. 

15See Better Markets Letter; Consumer Federation 

Letter. 

16The rule includes a reference to an ‘‘investment 

grade debt security,’’ which is defined as ‘‘a nonconvertible 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 creditworthiness 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 creditworthiness’’ 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). 

17See Proposing Release, Section II. 

18Section 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. 

19See 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. 

20For a discussion of the costs and benefits 

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

Trade Rule Release, Section VI.C. 

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 brokerdealers 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

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. 

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 brokerdealers and investment advisers in 

connection with the Dodd-Frank Act.17

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 brokerdealers 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. 

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. 

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 


tkelley on DSK3SPTVN1PROD with RULES
76882 Federal Register / Vol. 79, No. 246 / Tuesday, December 23, 2014 / Rules and Regulations 

21See 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’’). 

22See FSR Letter; Wells Fargo Letter. 

23See FSI Letter; FSR Letter; SIFMA 2014 Letter; 

Wells Fargo Letter. 

24See Barnard Letter; FSI Letter; FSR Letter; 

SIFMA 2014 Letter; Wells Fargo Letter. 

25See FSR Letter; SIFMA 2014 Letter; Wells Fargo 

Letter. 

26See 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). 

27See FSR Letter; SIFMA 2014 Letter. 

28See FSR Letter; SIFMA 2014 Letter; Wells Fargo 

Letter. 

29See FSR Letter; SIFMA 2014 Letter. 

30See Wells Fargo Letter. 

31See Better Markets Letter; Consumer Federation 

Letter. 

32See 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). 

33See 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’’). 

34See id. 

35See Consumer Federation Letter. 

36See FSI Letter; FSR Letter; SIFMA 2014 Letter; 

Wells Fargo Letter. 

37As 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. 

38Several 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. 

39See Better Markets Letter; Consumer Federation 

Letter. 

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 nondiscretionary 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

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

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

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

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 brokerdealers 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

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 


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Federal Register / Vol. 79, No. 246 / Tuesday, December 23, 2014 / Rules and Regulations 76883 

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. 

41See 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’’). 

42See 2007 Principal Trade Rule Release, Section 

II.B. 

43See id. 

44Specifically, 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). 

45See 2007 Principal Trade Rule Release, Section 

II.B. 

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). 

48See 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). 

49See supra note 19 and accompanying text. 

50Staff 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). 

52See FSI Letter; FSR Letter; SIFMA 2014 Letter; 

Wells Fargo Letter. 

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-bytransaction 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

Moreover, we note that the rule is 

limited to principal trades with nondiscretionary 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

We believe that the requirements of 

rule 206(3)–3T, coupled with regulatory 

oversight, will adequately protect nondiscretionary advisory clients for an 

additional limited period of time while 

we consider more broadly the regulatory 

requirements applicable to brokerdealers 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

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. 

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. 

For the reasons discussed above, we 

believe that the rule’s sunset date 


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53See Proposing Release, Section II. 

54 5 U.S.C. 553(d). 

55 Id. 

56 44 U.S.C. 3501 et seq. 

57See Proposing Release, Section IV. 

58See Proposed Collection; Comment Request, 78 

FR 72932 (Dec. 4, 2013); Submission for OMB 

Review; Comment Request, 79 FR 7481 (Feb. 7, 

2014). 

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. 

60See 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. 

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. 

62Based on IARD data as of October 1, 2014, there 

are 291 SEC-registered advisers that are also 

registered as broker-dealers that have nondiscretionary 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. 

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 brokerdealers 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 nondiscretionary advisory clients’ 

continued access to certain securities 

and any new investor protection 

concerns that we may identify through 

our examination program or otherwise. 

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. 

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

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. 

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. 

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 brokerdealers 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 brokerdealers 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

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. 

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 nondiscretionary 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 


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63See Consumer Federation Letter. 

64See id. 

65See 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 nondiscretionary 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). 

66See 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. 

67Section 206(3) of the Advisers Act requires an 

investment adviser to provide written conflict-ofinterest 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 transactionby-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. 

69See Better Markets Letter; Consumer Federation 

Letter. 

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 nondiscretionary advisory clients, however, 

we recognize that the economic effects 

could vary significantly among firms 

and their clients. 

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 brokerdealers 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 nondiscretionary 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. 

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 nondiscretionary 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 


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70See 2007 Principal Trade Rule Release, Section 

I.B. 

71See Comment Letter of National Association of 

Personal Financial Advisors (Dec. 20, 2010). 

72See 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). 

73See 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. 

74See 2009 Extension Release, Section VI; 2010 

Extension Release, Section VI; 2012 Extension 

Release, Section V. 

75See 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. 

77See id. 

78See 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). 

79See FSR Letter; SIFMA 2014 Letter; Wells Fargo 

Letter. 

80See Proposing Release, Section VI. 

inventory of a diversified broker-dealer 

and clients may wish to access these 

securities through their nondiscretionary advisory accounts.70

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 selfregulatory organizations, and the 

fiduciary duty and other obligations 

imposed by the Advisers Act. 

We also previously received 

comments opposing the limitation of the 

temporary rule to investment advisers 

that are registered with us as brokerdealers, as well as to accounts that are 

subject to both the Advisers Act and 

Exchange Act as providing a 

competitive advantage to investment 

advisers that are 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 brokerdealers.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 brokerdealers and investment advisers. 

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-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 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

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. 

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 brokerdealers and investment advisers. Should 

our consideration of the fiduciary 

obligations and other regulatory 

requirements applicable to brokerdealers 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. 

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

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 brokerdealers 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 


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81See 17 CFR 275.0–7. 

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. 

83See 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. 85See 5 U.S.C. 603(c). 

86See 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)). 

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

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. 

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 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 brokerdealers. 

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. 

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. 

VII. Statutory Authority 

The Commission is amending rule 

206(3)–3T pursuant to sections 206A 


tkelley on DSK3SPTVN1PROD with RULES
76888 Federal Register / Vol. 79, No. 246 / Tuesday, December 23, 2014 / Rules and Regulations 

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 

■ 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. 

* * * * * 

§ 275.206(3)–3T [Amended] 

■ 2. In § 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 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Food and Drug Administration 

21 CFR Part 316 

[Docket No. FDA–2011–N–0583] 

Policy on Orphan-Drug Exclusivity; 

Clarification 

AGENCY: Food and Drug Administration, 

HHS. 

ACTION: Notification; clarification on 

policy. 

SUMMARY: The Food and Drug 

Administration (FDA) is publishing this 

document to clarify its policy regarding 

certain aspects of orphan-drug 

exclusivity. This document is being 

published because of a recent court 

decision interpreting provisions of the 

Federal Food, Drug, and Cosmetic Act 

(the FD&C Act), as amended by the 

Orphan Drug Act. 

DATES: Effective December 23, 2014. 

FOR FURTHER INFORMATION CONTACT: 

Gayatri R. Rao, Office of Orphan 

Products Development, Food and Drug 

Administration, 10903 New Hampshire 

Ave., Bldg. 32, Rm. 5271, Silver Spring, 

MD 20993, 301–796–8660. 

SUPPLEMENTARY INFORMATION: 

I. Background 

After a designated orphan drug is 

approved, section 527 of the FD&C Act 

(21 U.S.C. 360cc) generally prohibits the 

Food and Drug Administration (FDA or 

the Agency) from approving another 

such drug for the same disease for 7 

years. Regulations interpreting this 

provision were proposed in 1991 

(January 29, 1991, 56 FR 3338) and 

made final in 1992 (December 29, 1992, 

57 FR 62076). In 2011, FDA issued a 

proposed rule (October 19, 2011, 76 FR 

64868) to amend these regulations to 

clarify certain regulatory language and 

propose areas of minor improvement 

regarding orphan-drug designation and 

orphan-drug exclusivity; these were 

finalized in 2013 (June 12, 2013, 78 FR 

35117). These regulations are codified 

under part 316 (21 CFR part 316). 

FDA has interpreted section 527 of 

the FD&C Act and its regulations such 

that the Agency will not recognize 

orphan-drug exclusivity for a drug when 

it has previously approved the same 

drug for the same use or indication in 

a rare disease or condition. 

§§ 316.3(b)(12); 316.31(a). A drug will 

not be considered the same as a 

previously approved drug if, at the time 

of approval, the sponsor has provided 

evidence that its drug is ‘‘clinically 

superior’’ to the previously approved 

drug, that is, the drug is more effective, 

safer, or makes a major contribution to 

patient care. § 316.3(b)(3). Accordingly, 

the sponsor of an orphan-designated 

drug that is the same as a previously 

approved drug, as defined in 

§ 316.3(b)(14), is required to 

demonstrate that its drug is clinically 

superior to the previously approved 

drug in order for its drug to be eligible 

for orphan-drug exclusivity upon 

approval. 

The Agency’s interpretation of section 

527 of the FD&C Act has been the 

subject of legal action in Depomed v. 

HHS et al., Civil Action No. 12–1592 

(KBJ) (D.D.C. September 5, 2014). 

Depomed has not demonstrated that 

GRALISE (gabapentin) is clinically 

superior to a previously approved drug, 

Pfizer’s NEURONTIN (gabapentin). 

Accordingly, under the relevant 

regulations, GRALISE is the same drug 

as NEURONTIN, because it contains the 

same active moiety (gabapentin), was 

approved for the same use (postherpetic neuralgia), and was not 

demonstrated to be clinically superior to 

NEURONTIN. Nevertheless, the 

Depomed court held that FDA must 

recognize orphan-drug exclusivity for 

GRALISE for the treatment of postherpetic neuralgia. Following the 

Depomed decision, under the court’s 

order, FDA recognized orphan-drug 

exclusivity for GRALISE for the 

treatment of post-herpetic neuralgia. 

II. Orphan-Drug Exclusivity 

In consideration of any uncertainty 

created by the court’s decision in 

Depomed, the Agency is issuing this 

statement. It is the Agency’s position 

that, given the limited terms of the 

court’s decision to GRALISE, FDA 

intends to continue to apply its existing 

regulations in part 316 to orphan-drug 

exclusivity matters. FDA interprets 

section 527 of the FD&C Act and its 

regulations (both the older regulations 

that still apply to original requests for 

designation made on or before August 

12, 2013, as well as the current 

regulations) to require the sponsor of a 

designated drug that is the ‘‘same’’ as a 

previously approved drug to 

demonstrate that its drug is ‘‘clinically 

superior’’ to that drug upon approval in 

order for the subsequently approved 

drug to be eligible for orphan-drug 

exclusivity. 

Dated: December 17, 2014. 

Leslie Kux, 

Associate Commissioner for Policy. 

[FR Doc. 2014–29920 Filed 12–22–14; 8:45 am] 

BILLING CODE 4164–01–P 

DEPARTMENT OF THE INTERIOR 

Bureau of Indian Affairs 

25 CFR Part 151 

[K00103 14/15 A3A10; 134D0102DR– 

DS5A300000–DR.5A311.IA000115] 

RIN 1076–AF23 

Land Acquisitions in the State of 

Alaska 

AGENCY: Bureau of Indian Affairs, 

Interior. 

ACTION: Final rule. 

SUMMARY: This rule deletes a provision 

in the Department of the Interior’s landinto-trust regulations that excludes from 

the scope of the regulations, with one 

exception, land acquisitions in trust in 

the State of Alaska. 

DATES: This rule is effective January 22, 

2015. 

FOR FURTHER INFORMATION CONTACT: 

Elizabeth Appel, Director, Office of 

Regulatory Affairs & Collaborative 

Action, (202) 273–4680; 

elizabeth.appel@bia.gov. 


tkelley on DSK3SPTVN1PROD with RULES