OCIE Issues Risk Alert on Principal Trading and Cross Transaction Compliance Obligations

The SEC Office of Compliance, Inspections and Examinations (OCIE) issued a Risk Alert to remind investment advisers of their compliance obligations for principal trading and agency cross transactions involving clients. Specifically, OCIE alerted investment advisers of their responsibility to comply with disclosure and consent requirements under the Investment Advisers Act and that, except for specific circumstances related to cross trades, the rules require compliance on a “transaction-by-transaction basis – blanket disclosure and consent are not permitted.”

OCIE highlighted “the most common deficiencies” concerning principal trading and agency cross transactions raised in firm examinations over the past three years. For principal transactions, these include failures to (i) provide written disclosures to individual clients or obtain required client consent; (ii) obtain client consent before each trade; and (iii) “provide sufficient disclosure” concerning potential conflicts and transaction terms. OCIE also found principle transaction compliance deficiencies for advisers working with pooled investment vehicles, noting the applicability of the rules and consent requirements for such vehicles. For cross transactions, OCIE observed failures to (i) disclose engagements in agency cross transactions, and (ii) produce documentation to demonstrate the written consent, confirmation, and disclosure compliance.

OCIE cautioned advisers to “review their written policies and procedures and the implementation of those policies and procedures to ensure that they are compliant with the principal trading and agency cross transaction requirements.” According to Robert Lavigne, Managing Director, Bates Compliance, “Firms have to ensure their disclosures are being made to clients, so that they fully understand the conflicts relating to this type of transaction prior to providing consent to the firm.”

How Bates Compliance Can Help You:

Bates Compliance provides tailored compliance consulting solutions to financial services clients. Our compliance team includes senior compliance staff and former regulators, who test policies, procedures, supervisory and compliance processes, against industry standards, recommending changes and best practices to enhance compliance and supervisory systems, and to assist in the remediation of regulatory findings.

For more on Bates Compliance consulting services, please give us a call at (503) 670-7772 or contact: 

Robert Lavigne, Managing Director, Bates Compliance

Email: rlavigne@batesgroup.com   Phone: 508-868-6741

Rory O'Connor, Director, Business Development

Email: roconnor@batesgroup.com   Phone: 860-671-7270

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