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Alternative Market Briefing

Other Voices: OCIE issues risk alert on trading compliance issues

Thursday, September 26, 2019

By: Jonathan Levy, Ballard Spahr

The Securities and Exchange Commission's Office of Compliance Inspections and Examinations (OCIE) issued a risk alert earlier this month from its national examination program warning investment advisers of the most common compliance deficiencies that OCIE found related to principal trading and agency cross transactions under the Investment Advisers Act of 1940 (the Adviser's Act). As most compliance professionals know, a risk alert is often a precursor to aggressive enforcement action in a particular area and allows the Commission to tell advisers that they were warned. The takeaway: paying close attention to a risk alert is prudent.

The risk alert begins by reviewing adviser compliance requirements for principal trading and agency cross transactions with clients.

Principal Trading

Under Section 206(3) of the Adviser's Act, an adviser acting as a principal for his or her own account cannot knowingly sell any security to a client or purchase any security from a client without disclosing to the client in writing before the completion of the transaction the capacity in which the adviser is acting and obtaining consent from the client for the transaction. The disclosure and consent requirements cannot be undertaken in blanket fashion. An adviser's conflict of interest in this situation creates risk, so the SEC requires disclosure and consent on a transaction-by-transaction basis.1

Brokering Trades

Generally, ......................

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