SIFMA Requests Relief from Investment Adviser Principal Transaction Rules
Commentary by Andrew Lom
SIFMA requested regulatory relief from the SEC's current interpretation of Advisers Act Section 206(3) ("Prohibited transactions by investment advisers"). SIFMA argued that the current transaction-by-transaction consent requirements hamper client execution.
In a letter to SEC Chair Paul Atkins, SIFMA contended that principal trading offers significant benefits to advisory clients, including access to fractional shares for portfolio rebalancing, wider varieties of fixed-income securities, and improved liquidity. The association argued that the current strict interpretation—originating from concerns about "dumping unwanted securities"—is no longer necessary given modern market transparency and the robust fiduciary framework. SIFMA noted that the existing requirements often operate as a de facto prohibition on beneficial trades due to the speed of modern electronic markets, putting advisers at a competitive disadvantage compared to broker-dealers who operate without such restrictions.
SIFMA also emphasized that the potential conflicts of interest Section 206(3) was designed to address are effectively managed through the existing fiduciary standard and Regulation Best Interest. The association highlighted that broker-dealers are not subject to transaction-by-transaction consent requirements, and harmonizing these rules would reduce client confusion while maintaining investor protection. SIFMA pointed to the success of a now-expired temporary rule, which allowed for similar flexibility for nine years without negative impacts, as evidence that these restrictions can be safely lifted. SIFMA further asserted that the SEC already possesses the regulatory authority to interpret the statute more flexibly, as it has done previously with agency cross transactions.
The association recommended that the SEC provide relief by: (i) eliminating the requirement for transaction-by-transaction written disclosure and consent for both discretionary and non-discretionary clients; (ii) allowing for prior written consent to principal transactions following full disclosure of potential conflicts; and (iii) requiring that clients receive written confirmations in accordance with Exchange Act Rule 10b-10 ("Confirmation of transactions"), a provision stating that the client’s consent may be revoked at any time.
Commentary
The essence of SIFMA’s proposal is procedural, not substantive. It would give advisers and brokers a more level playing field to execute principal trades under blanket informed consents, with client objections affecting future transactions, but not unwinding those already executed. Crucially, advisers would remain subject to the Advisers Act’s fiduciary duty at all times, while brokers would continue to fall under the Reg BI standard. This is not a safe harbor for advisers to sidestep their fiduciary obligations.