The SEC’s Office of Compliance Inspections and Examinations (OCIE) has issued a Risk Alert describing failures by investment advisers to comply with regulatory requirements when engaging in principal and agency-cross transactions. OCIE found that many advisers did not even recognize that they were engaging in principal (direct transaction with client) or agency cross (receiving compensation on behalf of third party) transactions. For example, many advisers faltered by not recognizing that a significant ownership interest in a private fund made them principals. Also, advisers with broker-dealer affiliates often ran afoul of the agency-cross rules. The OCIE staff also criticized advisers for failing to observe the significant notice and transaction-by-transaction consent requirements. In response to this Risk Alert, OCIE “encourages advisers to review their written policies and procedures and the implementation of those policies and procedures.”
Very often, these Risk Alerts immediately precede a specialized sweep exam or a focus during regular exams. We would recommend that all advisers and compli-pros take a hard look at their principal and agency-cross transaction practices and policies.