Securities Law and Regulations

SEC Extends Temporary Rule Allowing Principal Trades by Investment Advisers Registered as Broker-Dealers

Published on: January 13, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission has adopted amendments to delay the expiration date of Rule 206(3)-3T under the 1940 Investment Advisers Act. The temporary rule, which was supposed to expire on December 31, 2010, will now stay in effect until December 31, 2012.

Rule 206(3)-3T gives investment advisers that are also broker-dealers who are registered with the SEC another way to satisfy the Advisers Act’s Section 206(3) requirements when they work in a principal capacity with certain advisory clients. Section 206(3) does not allow investment advisers to effect or take part in a transaction for a client while acting either as broker for a person besides the client or as principal for its own account unless the client has been informed of the role that the adviser is playing and has given his or her consent. The SEC says it is completing its study on broker-dealers and investment advisers, per the Dodd-Frank Wall Street Reform and Consumer Protection Act mandate, and it will deliver the report to Congress by January 21.

Under Rule 206(3)-3T, an adviser is allowed to comply with Section 206(3) of the Advisers Act by, among other things:

• Providing written prospective disclosure about principal trade conflicts.
• Getting revocable written consent from the client that prospectively gives the adviser the authority to enter into principal transactions.
• Making certain written or oral disclosures and getting the client’s consent prior to each principal transaction.
• Sending the client confirmation statements that disclose that the adviser notified the client that it could act in a principal capacity and it has the client’s consent.
• Giving the client an annual report that itemizes the principal transactions.

Related Web Resources:

The “New” SEC is Acting Just Like The “Old” SEC by Protecting the Securities Industry from Responsibility for its Actions, Stockbroker Fraud Blog, December 9, 2010

SEC Adopts Direct Access Rule Prohibiting “Naked” Access to ATSs or Exchanges

Published on: November 21, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Commission has adopted a rule that prohibits brokers from having “naked” access to alternative trading systems (ATS) or exchanges while requiring brokers with market access to put into place supervisory procedures and risk management controls to prevent market errors and other problems. Under the 1934 Securities Exchange Act’s new Rule 15c3-5, both broker-dealers that belong to an ATS or an exchange and ATS broker-dealer operators that allow direct trading by persons who aren’t dealers or brokers must put into place certain supervisory procedures and controls to effectively get rid of “naked” access arrangements (also known as “unfiltered” access arrangement) that have allowed customers to bypass broker-dealers and their risk management controls completely while giving them direct electronic access to an ATS or an exchange.

Also per the new rule, new risk management controls must be put into place to stop orders that exceed capital thresholds or pre-set credit, do not comply with regulatory requirements, or appear erroneous in another way. Brokers-dealers also must implement certain controls before the orders are sent to ATSs or exchanges, set up, document, and maintain procedures to regularly evaluate the risk management controls, and tackle any problems as soon as possible.

The SEC believes that to put into place these new systems will initially cost broker-dealers some $100 million. Maintenance of the systems is expected to cost about $100 million a year.

Related Web Resources:
SEC Adopts New Rule Preventing Unfiltered Market Access, SEC.gov, November 3, 2010

SEC rule to clamp down on ‘naked access,’ Financial Times, November 4, 2010

Final Regulation for Disclosure in Participant-Directed Individual Account Plans Issued by US Department of Labor

Published on: November 19, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The US Department of Labor has put out a final regulation that establishes the fiduciary requirements for disclosure in 401 (k)’s and other participant-directed individual account plans. The final regulation was issued under the Employee Retirement Income Security Act of 1974. The DOL guidance also comes with a final amendment to the regulation that already exists under ERISA § 404(c), 29 C.F.R. § 2550.404c-1.

The disclosure requirements answer a number of questions, including:
• Who is responsible for disclosing information to beneficiaries and participants in individual account plans that are participant-directed?
What information must be disclosed?
• What are the rules when dealing with target date funds, fixed-return investments, annuities, and employer securities?
• What type of disclosure is required?
• When should disclosure of information be made to participants and beneficiaries?
• Who should disclose the information?

Under the final regulation, the plan administrator of an individual account plan must make sure that beneficiaries and participants are made aware of their responsibilities and rights in regards to their investments. They also must receive enough information about the plan, investment alternatives, and fees and expenses so that they can make informed decisions.

Under the final regulation, participants and beneficiaries of “covered individual account plans” must receive disclosure in four categories of information, including:
• General Operational and Identification Information
• General Plan Administrative Expenses
• Individual Expenses
• Investment-Related Information

Plan administrators also have to automatically disclose certain performance benchmarks and data, including the average annual return of the investment over 1, 5, and 10 calendar year periods, as well as provide a statement noting that past performance does not guarantee that the results in the future will be the same. Designated investment alternatives that have a stated or fixed return for the term of the investment must come with a disclosure that includes the term of the investment and the fixed or stated annual return rate.

For more details, contact Shepherd Smith Edwards and Kantas founder and securities fraud attorney William Shepherd.

Employee Retirement Income Security Act — ERISA, US Department of Labor

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