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SEC Identifies Compliance Deficiencies in Fixed Income Principal and Cross Trades

The SEC Department of Examinations (the "Department") observed deficiencies with respect to compliance programs, conflicts of interest and disclosures in the practices of investment advisers executing principal and cross trades in fixed income securities.

In a Risk Alert, Division staff identified the following compliance deficiencies:

  • policies and procedures that (i) were not consistent with regulatory requirements, (ii) failed to include necessary considerations or guidance, leading examined advisers' personnel to be unprepared to achieve compliance and (iii) were not sufficiently tested;

  • conflicts of interest that were not identified, mitigated or disclosed, such as cross trades that (i) were not executed at independent market prices for the securities, (ii) did not provide best execution and (iii) were subject to undisclosed markups or fees; and

  • written disclosures in Form ADVs that did not include information as to cross-trading activity or the related conflicts of interest.

The Division provided suggestions as to how advisers should improve their compliance programs and disclosures, including:

  • adopting policies and procedures that (i) clearly define covered activities, (ii) set standards for engaging in principal and cross trades, and (iii) establish controls to determine whether policies and procedures are being followed; and

  • providing full and fair disclosure regarding principal and cross trades in multiple documents.

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Sub-Activity: 
Advisory Cross and Principal Transactions
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SEC OCIE