SEC Attacks Principal Transactions, Cross-Trading and Agency Cross-Trading (Again)
The SEC’s Division of Examinations has again warned advisers about compliance failures when engaging in principal trading with clients, cross-trading between clients, and agency cross-trading.
In a follow-up to its 2019 Risk Alert, the staff highlights conflicts of interest as well as compliance and disclosure failures and offers best practices. Among compliance mishaps uncovered during examinations included engaging in transactions in violation of the compliance policies, failing to obtain client consents, and policies and procedures that were too general to ensure best interest and best execution requirements. The staff also faulted firms for failing to test for unauthorized or undocumented trading transactions. The staff identified conflicts of interest such as failures to obtain independent market prices or charging undisclosed markups and other fees. Advisers also failed to fully describe trading in client agreements and Form ADV. The staff helpfully offers best practices for setting compliance standards, how to conduct testing, and drafting fulsome disclosures.
Our compliance advice (especially now that the SEC has adopted Regulation Best Interest and Form CRS) is to avoid principal trading, cross-trading and agency cross-trading. The SEC has intentionally imposed burdensome compliance and disclosure requirements which are difficult to meet. Perhaps, the only exception would be situations where such a transaction is so unique that it benefits the client and does not benefit the adviser, and the firm documents the transaction’s rationale and best interest execution.
Read Risk Alert here.