SEC Principal Trading Rule Exemption Set to Expire at Year’s End

November 21, 2016

The staff of the U.S. Securities and Exchange Commission (SEC) stated in August that it intends to permit the expiration of rule 206(3)-3T (Rule) under the Investment Adviser Act of 1940 (Advisers Act). The SEC originally adopted the Rule in 2007 to provide investment advisers with an alternative means to comply with the requirements of Section 206(3) of the Advisers Act, which generally prohibits an investment adviser from engaging in or effecting transactions on behalf of a client while acting as a principal for the adviser’s own account.

The Rule was in effect for an initial 27 months, and then extended for successive one-year and two-year periods; it is currently set to expire at the end of 2016. David W. Grim, Director of the SEC’s Division of Investment Management (Division), indicated on August 19, 2016 that the Division would not recommend that the SEC extend the Rule beyond its set expiration on December 31, 2016. The expiration of the Rule would prevent investment advisers from effecting transactions with clients on a principal basis without obtaining prior written client consent for each trade.

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