[ by Howard Haykin ]

The SEC proposes to amend 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 would extend the date on which rule 206(3)-3T will sunset from December 31, 2012 to December 31, 2014.

SEC Staff Contacts. Melissa Gainor, Attorney-Adviser, Vanessa Meeks, Attorney-Adviser, Sarah Buescher, Branch Chief, Daniel Kahl, Assistant Director, at (202) 551-6787 or IArules@sec.gov, [Members of Office of Investment Adviser Regulation].

For further details, go to:  SEC Proposed Rule Release IA-3483, 10/9/12].

Background Info. On 9/24/07, the SEC adopted, on an interim final basis, Rule 206(3)-3T, a temporary rule under the Investment Advisers Act of 1940 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. The purpose of the rule was to permit broker-dealers to sell to their advisory clients, in the wake of Financial Planning Association v. SEC (the "FPA Decision"), 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.

The Rule was to have sunset at earlier points in time, but as each sunset date approached, the SEC extended the life of the temporary rule.

The 2012 extension is proposed because the Commission continues 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.

We believe that the requirements of rule 206(3)-3T, coupled with regulatory oversight, will adequately protect advisory clients for an additional limited period of time while we consider more broadly the regulatory requirements applicable to broker-dealers and investment advisers.

In the 2010 Extension Proposing Release, we discussed certain compliance issues identified by the Office of Compliance, Inspections and Examinations. 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.  Since 2010 and throughout the period of the proposed extension, the staff has and would 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.

In light of these considerations, we believe that it would be premature to require firms currently relying on the rule to restructure their operations and client relationships before we complete our consideration of the standards of conduct and regulatory requirements applicable to broker-dealers and investment advisers.

To read further into the proposal, go to:  [SEC Proposed Rule Release IA-3483, 10/9/12].