Request for Regulatory Relief for Principal Transactions by Investment Advisers under Advisers Act Section 206(3)

Summary

SIFMA provided comments to the U.S. Securities and Exchange Commission (SEC) requesting regulatory relief from the current interpretation of the Securities and Exchange Commission (“SEC”) staff that Section 206(3) of the Investment Advisers Act of 1940 (“Advisers Act”) requires transaction-by-transaction, prior written notice and consent for principal transactions by investment advisers.

Excerpt

December 1, 2025

Via Electronic Mail

The Honorable Paul S. Atkins, Chairman
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549

Re: Request for regulatory relief for principal transactions by investment advisers under Advisers Act Section 206(3)

Dear Chairman Atkins:

On behalf of our member firms, the Securities Industry and Financial Markets Association (“SIFMA”) ¹ hereby requests regulatory relief from the current interpretation of the Securities and Exchange Commission (“SEC”) staff that Section 206(3) of the Investment Advisers Act of 1940 (“Advisers Act”) requires transaction-by-transaction, prior written notice and consent for principal transactions by investment advisers.

Executive Summary

The SEC staff’s current interpretation of Section 206(3) is ripe for update and
modernization given that:

• Principal transactions benefit advisory clients;
• The staff’s interpretation imposes a significant burden without discernible benefit;
• Requiring transaction-by-transaction, prior written disclosure and consent is unnecessary to manage the prospective conflict of interest for principal transactions;
• Principal transactions by broker-dealers do not require transaction-by-transaction, prior written disclosure and consent, and the principal trading rules for brokers and advisers should be harmonized for the benefit of customers and clients; and
• The evolution of market structure, the regulatory duties of affiliated broker-dealers in principal transactions, and associated regulatory oversight, further mitigate the potential conflicts that Section 206(3) was designed to address.

The SEC staff already has the requisite regulatory authority to interpret and apply Section 206(3) in a less restrictive manner for the benefit of advisory clients. The SEC staff should
promptly exercise that authority to provide principal trading relief from Section 206(3) that includes the following non-exclusive elements:

• Eliminate the requirement for transaction-by-transaction written disclosure and consent for both discretionary and non-discretionary clients;
• Allow prior written consent for principal transactions upon/after full written disclosure of the potential conflicts associated with principal transactions and a conspicuous statement that the client’s consent may be revoked at any time; and
• Require that the client receive a written confirmation disclosing the principal transaction in accordance with Exchange Act Rule 10b-10 and applicable SEC no-action/exemptive relief thereunder (including permitting delivery of confirmations on a periodic basis to clients participating in a managed account program), and conspicuously stating that the client’s consent may be revoked at any time.

* * *

I. Background.

Section 206(3) of the Advisers Act states in pertinent part:

It shall be unlawful for any investment adviser … (3) acting as principal for his own account, knowingly to sell any security to or purchase any security from a client … without disclosing to such client in writing before the completion of such transaction the capacity in which he is acting and obtaining the consent of the client to such transaction. ²

The limited legislative history of Section 206(3) indicates that lawmakers were concerned in particular about unscrupulous advisers dumping unwanted securities on clients, potentially at unfavorable prices. In 1940, given the lack of depth, liquidity and transparency in the securities markets – and without the benefit of today’s robust regulatory requirements for broker-dealers, it was more likely that such abuses could occur and remain undetected. Keeping advisers at arms-length from principal transactions with their clients was, at the time, considered the best protection against self-serving conduct. As a result, the SEC staff has historically interpreted Section 206(3) to require an adviser entering into a principal trade with a client to satisfy the foregoing written disclosure and consent requirements on a transaction-by-transaction basis (and not via prior blanket disclosure and consent). ³

II. The SEC should provide principal trading relief for the benefit of advisory clients.

1. Principal transactions benefit advisory clients.

Principal trading benefits investors in numerous respects, including without limitation the following:

• Provides crucial support for individual investors who maintain systematic investment strategies (such as dividend reinvestment), or who seek rebalancing across their portfolio, both investor-beneficial programs which often require fractional share transactions to execute. Such transactions may pose operational challenges for some firms given that generally, fractional shares cannot be traded on a pure agency basis because they are not traded on the open market or exchanges.
• Provides individual investors with access to a wider variety of securities and investment strategies, including from firm inventories (e.g., fixed income securities, preferred shares, eligible syndicate securities, etc.).
• Provides individual investors with access to new issue retail notes which contain beneficial features specific to individual investors (e.g., estate planning survivor’s option) and market-linked retail notes with risk management features designed to protect against unforeseen market conditions, plus, such new issue notes can be sold to fee-based advisory accounts net of the sales concession if offered pursuant to a fixed price offering as provided by FINRA Rule 5141.
• Can provide increased liquidity and better execution for clients, particularly in markets where securities trade infrequently and/or there are limited pools of liquidity for firms to access on an agency basis.
• Provides investors with faster execution of trades in such securities.

Notwithstanding the long history of principal trading regulation, regulatory and market developments and evolving individual investor investment preferences and demographics suggest that now is an appropriate time to revisit whether the staff’s current interpretation and application of Section 206(3) are still necessary or appropriate.

• As the SEC itself has observed, fractional share trading “has grown dramatically since [late 2019]” and “[e]vidence suggests that this growth is in great part due to the rise in direct individual investor participation.” ⁴ Because individual investors increasingly invest in this manner, regulators should prioritize addressing potential barriers to investors doing so in advisory accounts on par with brokerage accounts. ⁵
• For many firms, a substantial segment of their clients are currently at or near retirement age. This large client group is not unexpected given the aging demographics of the population generally. These clients require support around income strategies, which would be facilitated and made more efficient by minimizing the impact of the current principal trading restriction for advisory accounts. Notably, many of these clients engage in buy-and-hold strategies and principal trading would provide for additional liquidity.

Continue Reading