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Advisers Ignoring Principal and Agency-Cross Rules


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. 

Managing Director used Prop Account to Trade Directly with Advisory Clients

The Managing Director of an IA/BD was censured and order to pay disgorgement and a fine for trading with his advisory clients out of a proprietary account without advance notice and consent.  The respondent arranged over 2,700 principal trades between his clients and a proprietary account over which he had trading authority.  The SEC asserts that he knowingly failed to provide the required disclosure about the mark-ups received as well as obtain the advance consent to engage in principal transactions.  FINRA previously barred his former firm from the industry in connection with churning allegations.

OUR TAKE: Although the regulators barred his firm, they did not stop there.  The SEC will hold individuals accountable for their firms’ legal violations especially if they participated and benefited.