Interim rule on principal trades likely

On Sept 19, the Securities and Exchange Commission is likely to adopt a temporary rule allowing brokers who have fee-based accounts to continue making principal trades.
The rule, which would expire after two years, is designed to give the SEC time to consider the results of a study being conducted by the RAND Corp. of Santa Monica, Calif., on how brokers and advisers should be regulated.
The U.S. Court of Appeals for the District of Columbia Circuit overturned the SEC’s earlier rule exempting brokers with approximately 1 million fee-based accounts from registering as investment advisers as a result of a lawsuit filed by the Financial Planning Association.
The court’s ruling is due to take effect Oct. 1.
A chief reason that brokers have sought to keep from registering as investment advisers is because securities law prohibits investment advisers from selling securities owned by the adviser to clients, a practice known as principal trading, without written authorization for each trade.
Brokers have argued that being obliged to get written approval for each transaction makes it effectively impractical to conduct principal trades, which are a major part of the brokerage business.
The SEC temporary rule would allow brokers who have the fee-based accounts to continue to make principal trades as long as certain conditions are met, including the requirement that such trades be done only in non-discretionary accounts.
The brokerage firms would also have to be dually registered as investment advisory firms.
The FPA and the Securities Industry and Financial Markets Association of Washington and New York are in basic agreement concerning the interim rule, but the National Association of Personal Financial Advisors of Arlington Heights, Ill., is opposed to it, saying there are too many conflicts of interest involved in allowing brokers to advise clients and make principal trades.

Related Topics: Securities and Exchange Commission