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Riskless principal: Difference between revisions
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There are four ways an investment advisor might purchase securities for a client. | There are four ways an investment advisor might purchase securities for a client. | ||
*A “'''riskless principal transaction'''” arises where an adviser (acting through an affiliated [[broker-dealer]]) purchases or sells a security for an advisory client. In executing the transaction, the adviser simultaneously buys or sells the security for the client through an offsetting transaction in the account of an affiliated [[broker-dealer]]. In this way, the security notionally, passes through the account of the affiliate broker-dealer who charges a small markup or markdown rather than a commission. Although resembling agency transactions, the SEC treats riskless principal transactions as principal transactions fully subject to Section 206(3) of the | *A “'''riskless principal transaction'''” arises where an adviser (acting through an affiliated [[broker-dealer]]) purchases or sells a security for an advisory client. In executing the transaction, the adviser simultaneously buys or sells the security for the client through an offsetting transaction in the account of an affiliated [[broker-dealer]]. In this way, the security notionally, passes through the account of the affiliate broker-dealer who charges a small markup or markdown rather than a commission. Although resembling agency transactions, the SEC treats riskless principal transactions as principal transactions fully subject to Section 206(3) of the [[Investment Advisers Act of 1940|40 Act]]. The SEC has brought a number of enforcement actions involving riskless principal transactions under Section 206(3). | ||
*A “'''cross transaction'''” is a transaction in which an adviser causes the purchase and sale of a security between two advisory client accounts without charging a fee for effecting the transaction. Where the client accounts are not owned by the adviser, a cross transaction is not a principal transaction subject to Section 206(3) because the adviser would not be “acting as broker” (assuming that neither no fee is charged for effecting the trade. If the adviser charges a fee the transaction would be deemed an “agency cross transaction” as discussed below). The {{tag|SEC}} has cautioned that cross transactions are nevertheless subject to Sections 206(1) and (2) of the Advisers Act and that an adviser may need to disclose information about cross transactions. | *A “'''cross transaction'''” is a transaction in which an adviser causes the purchase and sale of a security between two advisory client accounts without charging a fee for effecting the transaction. Where the client accounts are not owned by the adviser, a cross transaction is not a principal transaction subject to Section 206(3) because the adviser would not be “acting as broker” (assuming that neither no fee is charged for effecting the trade. If the adviser charges a fee the transaction would be deemed an “agency cross transaction” as discussed below). The {{tag|SEC}} has cautioned that cross transactions are nevertheless subject to Sections 206(1) and (2) of the Advisers Act and that an adviser may need to disclose information about cross transactions. | ||
*An “'''agency cross transaction'''” is where an investment adviser acts in relation to a transaction in which an affiliated broker-dealer acts as broker for both an advisory client and another person on the other side of the transaction and the affiliated broker-dealer charges a transaction fee for effecting the trade. Section 206(3) applies to agency cross transactions, even though neither the adviser nor the affiliated broker-dealer acts as principal with respect to the trade because the affiliate is “acting as broker for a person other than such client”. | *An “'''agency cross transaction'''” is where an investment adviser acts in relation to a transaction in which an affiliated broker-dealer acts as broker for both an advisory client and another person on the other side of the transaction and the affiliated broker-dealer charges a transaction fee for effecting the trade. Section 206(3) applies to agency cross transactions, even though neither the adviser nor the affiliated broker-dealer acts as principal with respect to the trade because the affiliate is “acting as broker for a person other than such client”. | ||