OCIE Publishes New Compliance Risk Alert for RIAs Addressing Trading Practices

The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) released a new Risk Alert on September 4th urging RIAs to review their compliance policies and procedures addressing principal trading and agency cross trading transactions.

We pay close attention to OCIE’s periodic Risk Alerts as these publications provide RIAs with not only a view of the results of recent OCIE exam, but also an insight into future exam priorities. This blog has provided commentary on all three of OCIE’s Risk Alerts for RIAs published thus far in 2019.Those alerts have focused on topics as diverse as hiring practices, customer record storage, and privacy notices.

This new Risk Alert encourages RIAs to revisit their policies and procedures designed to prevent violations of Advisers Act Section 206(3) and Rule 206(3)-2. Section 206(3) of the Advisers Act prohibits an adviser from engaging in the following trading activities, unless done with the consent of a client after receipt of written notice: (i) buying or selling a security from a client while acting as “principal for his own account” (“principal trading”); and (ii) acting as a broker for a person other than the client in order to effect a securities transaction between the client and the other person (“agency cross trading”).

For principal trading, the SEC further requires that the required client consent be obtained on a transaction by transaction basis. For agency cross trading, however, Rule 206(3)-2 permits the adviser to avoid transaction by transaction disclosure/consent so long as (i) the client has executed a prospective consent after having received full disclosure; (ii) the adviser provides written confirmations and required disclosures prior to each transaction; (iii) the adviser also provides an annual summary report to the client of all such transactions for the year; and (iv) the required written disclosures and confirmations “conspicuously” state that client consent may be freely revoked at any time.

OCIE’s new Risk Alert highlights common deficiencies in the areas of principal trading and agency cross trading transactions identified by staff examiners in conducting routine advisory exams over the past three years. Some of the specific deficiencies identified by the staff included the following:

  • Principal Trading Violations. In some cases, OCIE discovered advisers that were engaging in principal transactions without knowledge of the general prohibition contained in Section 206(3). Obviously, in such cases, the advisers failed to provide written disclosure to clients or obtain client consent to the principal trading. OCIE also discovered cases where the adviser recognized the applicability of Section 206(3), but nonetheless failed to adhere to its requirements (i.e., no disclosures, no consent, or both).
  • Principal Trading Violations Related to Pooled Investment Funds. OCIE also noted that, in certain instances, advisers failed to realize that their “significant ownership interest” (under current Commission guidance, 25% or more) of a pooled investment vehicle implicated Section 206(3). Accordingly, a trade between an advisory client and 25% adviser-owned pooled vehicle would be a principal trade. Additionally, other advisers executed trades directly between themselves and pooled investment fund clients without appreciating that such a transaction was subject to the principal trading prohibition.
  • Agency Cross Trading Violations. Notably, the Risk Alert cited instances of advisers publicly stating that they would not engage in agency cross transactions, only to in fact engage in numerous such transactions. Other advisers purported to rely on Rule 206(3)-2 but failed to produce any documentation evidencing such reliance.
  • Issues Relating To Advisory Policies And Procedures. OCIE also observed advisers with non-existent policies, deficient policies, as well as policies that were not followed in practice.

As is shown by the Risk Alert, there are numerous ways for an adviser to slip out of compliance in connection with principal trading and agency cross trading transactions. At a minimum, advisers should be able to recognize these transactions and understand the rules requiring disclosure and client consent. Additionally, all advisers, regardless of their trading practices, should have policies and procedures addressing principal trading and agency cross trading transactions—even if it a firm-wide prohibition on such transactions. As noted in the Risk Alert, this is an area where the SEC has taken enforcement action in response to violations of applicable rules. Given its spotlight by OCIE now, advisers should review their business practices and compliance policies accordingly.


Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our Investment Adviser Group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules.  Please visit our Investment Adviser Practice Group page for more information.