OCIE Releases List of Common Principal and Agency Cross Trading Compliance Issues

September 17, 2019

OCIE Releases List of Common Principal and Agency Cross Trading Compliance Issues

WHAT HAPPENED?

On Sept. 4, 2019, the Office of Compliance Inspections and Examinations of the Securities and Exchange Commission issued a Risk Alert regarding common principal and agency cross trading compliance concerns. Principal and agency cross trading are governed by Section 206(3) of the Advisers Act, which emphasizes transaction-by-transaction disclosure and consent requirements when entering into principal trades; there are several disclosure and consent exceptions when conducting agency cross trading. OCIE identified the common compliance gaps among investment advisers and broker-dealers.

• Some advisers failed to recognize that certain transactions qualified as principal trades subject to Section 206(3) and, therefore, did not exercise proper consent and disclosure practices. Other advisers understood that certain trades were subject to Section 206(3), but then failed to obtain consent and provide the required disclosures to clients.
• Client consent should be obtained before completing these transactions, but OCIE found that consent was often obtained after the fact.
• In the case of trades involving pooled investment vehicles, some advisers did not acknowledge that “significant ownership” of such investments would subject the transaction to Section 206(3). Some advisers did not obtain proper consent from pooled investment vehicles before executing transactions.
• Advisers engaging in agency cross trading were sometimes found to have communicated to clients that they would not do so when, in fact, they did. Other advisers that claimed compliance with agency cross transaction regulations could not produce any documentation to prove requirements were met.
• Many advisers completing principal trades and agency cross transactions did not have written policies and procedures in place which address Section 206(3).

WHAT DOES THIS MEAN FOR ME?

OCIE’s observations and subsequent findings outline the necessity of adopting and implementing policies and procedures that reflect your firm’s business practices. If your firm participates in principal or agency cross trading, you must address Section 206(3) in compliance policies and procedures. Fairview is committed to assisting your firm with maintaining compliance with SEC rules and regulations. Reach out to us for more information regarding Section 206(3) of the Advisers Act.