[Federal Register Volume 63, Number 141 (Thursday, July 23, 1998)]
[Rules and Regulations]
[Pages 39505-39508]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-19565]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 276

[Release No. IA-1732]


Interpretation of Section 206(3) of the Investment Advisers Act 
of 1940

AGENCY: Securities and Exchange Commission.

ACTION: Interpretation.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
publishing two interpretive positions under Section 206(3) of the 
Investment Advisers Act of 1940. Section 206(3) prohibits any 
investment adviser from engaging in or effecting a transaction on 
behalf of a client while acting either as principal for its own 
account, or as broker for a person other than the client, without 
disclosing in writing to the client, before the completion of the 
transaction, the adviser's role in the transaction and obtaining the 
client's consent. The first interpretive position identifies the points 
at which an adviser may obtain its client's consent to a principal or 
agency transaction. The second interpretive position identifies certain 
transactions for which an adviser would not be acting as broker within 
the meaning of Section 206(3).

DATES: Release No. IA-1732 is added to the list in Part 276 as of July 
17, 1998. The first interpretive position in Release No. IA-1732 is 
effective on September 21, 1998. The second interpretive position in 
Release No. IA-1732 is effective on July 23, 1998.

FOR FURTHER INFORMATION CONTACT: Douglas Scheidt, Associate Director 
and Chief Counsel, Karrie McMillan, Assistant Chief Counsel, or Eileen 
Smiley, Senior Counsel, 202/942-0660, Mail Stop 5-6, Division of 
Investment Management, 450 Fifth Street, N.W., Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION:

I. Introduction

    Section 206(3) of the Investment Advisers Act of 1940 \1\ makes it 
unlawful for any investment adviser, directly or indirectly ``acting as 
principal for his own account, knowingly to sell any security to or 
purchase any security from a client, or acting as broker for a person 
other than such client, knowingly to effect any sale or purchase of any 
security for the account of such client, without disclosing to such 
client in writing before the completion of such transaction the 
capacity in which he is acting and obtaining the consent of the client 
to such transaction.'' \2\ Section 206(3) thus imposes a prior consent 
requirement on any adviser that acts as principal in a transaction with 
a client, or that acts as broker (that is, an agent) in connection with 
a transaction for, or on behalf of, a client.\3\
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    \1\ 15 U.S.C. 80b-1, et seq. (the ``Advisers Act'').
    \2\ Section 206(3) expressly excludes any transaction between a 
broker or dealer and its customer if the broker or dealer is not 
also acting as an investment adviser in relation to the transaction. 
15 U.S.C. 80b-6(3).
    \3\ We and our staff have applied Section 206(3) to apply not 
only to principal and agency transactions engaged in or effected by 
any adviser, but also to certain situations in which an adviser 
causes a client to enter into a principal or agency transaction that 
is effected by a broker-dealer that controls, is controlled by, or 
is under common control with, the adviser. Staff no-action letter, 
Hartzmark & Co. (available Nov. 11, 1973) (applying Section 206(3) 
when an adviser effects transactions through its broker-dealer 
parent). See also Advisers Act Release No. 589 (June 1, 1977) [42 FR 
29300] (``Release No. 589'') (when adopting Rule 206(3)-2 under the 
Advisers Act, the non-exclusive safe harbor available for certain 
agency transactions, we expanded the rule to cover transactions 
effected through such affiliated broker-dealers).
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    In a principal transaction, an adviser, acting for its own account, 
buys a security from, or sells a security to, the account of a client. 
In an agency transaction, an adviser arranges a transaction between 
different advisory clients or between a brokerage customer and an 
advisory client. Advisory clients can benefit from both types of 
transactions, depending on the circumstances, by obtaining a more 
favorable transaction price for the securities being purchased or sold 
than otherwise available. Principal and agency transactions, however, 
also may pose the potential for conflicts between the interests of the 
adviser and those of the client.
    The wording and legislative history of Section 206(3) indicate that 
Congress recognized that both principal and agency transactions create 
the potential for advisers to engage in self-dealing.\4\ Principal 
transactions, in particular, may lead to abuses such as price 
manipulation or the placing of

[[Page 39506]]

unwanted securities into client accounts.\5\ When an adviser engages in 
an agency transaction on behalf of a client, it is primarily the 
incentive to earn additional compensation that creates the adviser's 
conflict of interest.\6\ In adopting Section 206(3), Congress 
recognized the potential for these abuses, but did not prohibit 
advisers entirely from engaging in all principal and agency 
transactions with clients. Rather, Congress chose to address these 
particular conflicts of interest by imposing a disclosure and client 
consent requirement in Section 206(3) of the Advisers Act.
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    \4\ See Investment Trusts and Investment Companies: Hearings on 
S. 3580 Before the Subcomm. of the Comm. on Banking and Currency, 
76th Cong., 3d Sess. 320 (1940) (statement of David Schenker, Chief 
Counsel, Securities and Exchange Commission Investment Trust Study) 
(hereafter ``Senate Hearings'') (``I think it is the Commission's 
recommendation that all self-dealing between the investment 
counselor and the client should be stopped.'').
    \5\ See Senate Hearings at p. 322 (``[I]f a fellow feels he has 
a sour issue and finds a client to whom he can sell it, then that is 
not right * * * .'') (Statement of David Schenker).
    \6\ Rule 206(3)-2 [17 CFR 275.206(3)-2] under the Advisers Act 
reflects the significance of an adviser's receipt of compensation in 
agency transactions effected by the adviser. The rule requires that 
the prospective client consent form and all subsequent trade 
confirmations indicate that the adviser will receive compensation in 
connection with any agency transaction. See Release No. 589.
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    Certain of our settled enforcement actions \7\ have raised 
questions regarding our interpretation of specific aspects of Section 
206(3). We are concerned that unless we clarify these issues, advisers 
will unnecessarily avoid engaging in principal and agency transactions 
that may serve their clients' best interests. Thus, we are taking this 
opportunity to clarify that: (1) an adviser may obtain client consent 
for purposes of Section 206(3) to a principal or agency transaction 
after execution, but prior to settlement, of the transaction; and (2) 
an adviser is not ``acting as broker'' within the meaning of the 
Section if the adviser receives no compensation (other than its 
advisory fee) for effecting a particular agency transaction between 
advisory clients.
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    \7\ See In the Matter of Piper Capital Management, Inc., 
Advisers Act Release No. 1435 (Aug. 11, 1994) (``Piper Capital''). 
See also In the Matter of Dimitri Balatsos, Advisers Act Release No. 
1324 (Aug. 18, 1992) (``Balatsos''); In the Matter of Micael L. 
Smirlock, Advisers Act Release No. 1393 (Nov. 29, 1993) 
(``Smirlock'').
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II. An Adviser Must Obtain the Informed Consent of Its Client to a 
Section 206(3) Transaction Before Settlement of the Transaction

    Section 206(3) prohibits any adviser from engaging in or effecting 
a principal or agency transaction with a client without disclosing in 
writing to the client, ``before the completion of such transaction,'' 
the capacity in which the adviser is acting and obtaining the client's 
consent. The Advisers Act, however, does not define when a transaction 
is ``completed'' for purposes of section 206(3).
    In Piper Capital,\8\ we found that an adviser violated Section 
206(3) in two ways: in some instances, the adviser failed to provide 
the necessary disclosure to clients; in other instances, the adviser 
failed to obtain client consent before the completion of principal 
transactions. Footnote 1 in the Piper Capital Order states that ``the 
phrase `completion of such transaction' under Section 206(3) of the 
Advisers Act * * * mean[s] prior to the execution of the transaction.''
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    \8\ See Piper Capital, id.
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A. Practical Concerns

    The footnote in the Piper Capital Order has raised concern among 
investment advisers who assert that it effectively requires investment 
advisers to obtain client consent prior to executing a principal or 
agency transaction, a point in time earlier than investment advisers 
previously had interpreted Section 206(3) to require. Advisers argue 
that obtaining client consent prior to execution of a transaction 
raises practical compliance difficulties for investment advisers. 
Finally, advisers assert that the Piper Capital position has raised 
confusion among investment advisers regarding their disclosure 
obligations with respect to principal and agency transactions with 
clients.\9\ It is our understanding that advisers find it difficult to 
satisfy their disclosure obligations under Section 206(3) prior to the 
execution of a transaction because of the practical difficulties of 
contacting some clients within a relatively short time, during which 
the market can move.
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    \9\ In 1945, our General Counsel took the position that, under 
Sections 206(1), (2) and (3) of the Advisers Act, an investment 
adviser must disclose to an advisory client any adverse interest 
that the adviser might have, ``together with any other information 
in his possession which the client should possess'' to facilitate an 
informed decision by the client whether to consent to a principal 
transaction. See Advisers Act Release No. 40 (Jan. 5, 1945) [11 FR 
10997] (``Release No. 40''). In the view of our General Counsel at 
the time, that information included, at a minimum: (1) the capacity 
in which the adviser proposed to act; (2) the cost of the security 
to the adviser if sold to a client; (3) the price at which 
securities could be resold if purchased from a client; and (4) the 
best price at which the transaction could be effected, if more 
advantageous to the client than the actual transaction price (``best 
price''). In a subsequent release adopting a rule creating a limited 
exemption from Section 206(3) for certain broker-dealers, we took 
the position that whether the specific items identified in Release 
No. 40 must be disclosed depends upon their materiality to a 
particular transaction, and the extent to which the client is 
relying on the adviser concerning that transaction. See Advisers Act 
Release No. 470 (Aug. 20, 1975) [40 FR 38158] (adopting Rule 206(3)-
1) [17 CFR 275.206(3)-1] (``Release No. 470'').
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    Representatives of the investment advisory industry have expressed 
concern to us and our staff that the practical difficulties caused by 
the Piper Capital position have discouraged advisers from engaging at 
all in principal transactions with clients, contrary to the intent of 
Congress in enacting Section 206(3).\10\ Industry representatives thus 
have sought clarification of our interpretation of the phrase ``before 
the completion of such transaction'' so that they can reconcile the 
timing of disclosure and consent with the types of disclosure that they 
must provide to clients when soliciting consent to a principal or 
agency transaction.
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    \10\ Although Section 206(3) applies to both principal and 
agency transactions, the investment advisory industry has raised 
questions about the operation of the Section primarily in the 
context of principal transactions. We believe that this result may 
reflect the operation of an existing rule under the Advisers Act. 
Advisers seeking to engage in agency transactions typically rely on 
Rule 206(3)-2 [17 CFR 275.206(3)-2] under the Advisers Act, which 
provides a non-exclusive safe harbor for certain agency 
transactions. Our interpretive position in Part II of this release 
applies to both principal transactions and to those agency 
transactions for which an adviser does not rely on Rule 206(3)-2 [17 
CFR 275.206(3)-2].
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B. The Disclosure and Consent Required Under Section 206(3) of the 
Advisers Act

    We are taking this opportunity to clarify our view as to aspects of 
the disclosure obligation of an adviser seeking to engage in a 
principal or agency transaction with an advisory client. In response to 
the practical concerns discussed above, we also are clarifying when an 
adviser may obtain client consent to a principal or agency transaction 
as required by Section 206(3).
1. The Adviser Must Disclose Potential Conflicts of Interest To Ensure 
That a Client's Consent Is Informed
    Section 206(3) expressly requires that a client be given written 
disclosure of the capacity in which the adviser is acting, and that the 
adviser obtain its client's consent to a Section 206(3) transaction. 
The protection provided to advisory clients by the consent requirement 
of Section 206(3) would be weakened, however, without sufficient 
disclosure of the potential conflicts of interest and the terms of a 
transaction. In our view, to ensure that a client's consent to a 
Section 206(3) transaction is informed, Section 206(3) should be read 
together with Sections 206(1) and (2)\11\ to require the adviser to 
disclose

[[Page 39507]]

facts necessary to alert the client to the adviser's potential 
conflicts of interest in a principal or agency transaction.\12\
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    \11\ Sections 206(1) and 206(2) of the Advisers Act also impose 
on advisers an affirmative duty of good faith with respect to their 
clients and a duty of full and fair disclosure of all facts that are 
material to the advisory relationship with their clients. See 
Release No. 470, supra, n. 9 (whether Sections 206(1) and (2) 
require disclosure of specific facts about a transaction depends on 
the ``materiality of such facts in each situation and upon the 
degree of the client's trust and confidence in and reliance on the 
adviser with respect to the transaction.''). See also Note to Rule 
206(3)-1 [17 CFR 275.206(3)-1] (the exemption from Section 206(3) 
for certain broker-dealers does not relieve an investment adviser of 
``any disclosure obligation which, depending upon the nature of the 
relationship between the investment adviser and the client, may be 
imposed by subparagraph (1) or (2) of Section 206 * * *'').
    \12\ In three separate releases, we or our staff have identified 
certain categories of relevant information that advisers may be 
required to disclose when they execute principal or agency 
transactions with advisory clients. See Release Nos. 40 and 470, 
supra n. 9. See also Advisers Act Release No. 557 (Dec. 2, 1976) [41 
FR 53808] (``Release No. 557'') (in proposing rule 206(3)-2, the 
non-exclusive safe harbor for certain agency transactions, we 
identified certain categories of information that generally should 
be disclosed by an adviser when executing a principal transaction 
with a client). This release supplements the three prior releases by 
identifying the information specified in those releases that 
advisers may not be able to provide to a client prior to the 
execution of a Section 206(3) transaction. This release discusses 
comparable information that may be disclosed instead when an adviser 
seeks to obtain client consent prior to the execution of a Section 
206(3) transaction.
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2. The Timing of Consent
    Section 206(3) requires that an adviser disclose to its client in 
writing before the ``completion'' of a Section 206(3) transaction the 
capacity in which it is acting and obtain the client's consent to the 
transaction. We believe that, for purposes of Section 206(3), a 
securities transaction is completed upon settlement, not upon 
execution. This interpretation is consistent with the express terms of 
Section 206(3) and the legislative intent underlying the Section. 
Implicit in the phrase ``before the completion of such transaction'' is 
the recognition that a securities transaction involves various stages 
before it is ``complete.'' The phrase ``completion of such 
transaction'' on its face would appear to be the point at which all 
aspects of a securities transaction have come to an end. That ending 
point of a transaction is when the actual exchange of securities and 
payment occurs, which is known as ``settlement.'' \13\ The date of 
execution (i.e., the trade date) marks an earlier point of a securities 
transaction at which the parties have agreed to its terms and are 
contractually obligated to settle the transaction.\14\ Interpreting the 
phrase ``completion of such transaction'' to mean at the time of 
settlement of the transaction is consistent with Congress' intent in 
enacting Section 206(3) by facilitating disclosure by advisers of 
material information about a transaction and informed consent by 
advisory clients. Thus, in our view, an adviser may comply with Section 
206(3) either by obtaining client consent prior to execution of a 
principal or agency transaction, or after execution but prior to 
settlement of the transaction.
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    \13\ See, e.g., 6 L. Loss & J. Seligman, Securities Regulation 
Ch. 7, p. 29d9 (3d ed. 1990).
    \14\ The interpretive positions expressed in this release apply 
only to an adviser's disclosure obligations under Section 206(3) of 
the Advisers Act. Other provisions of the federal securities laws, 
including the antifraud provisions of the Securities Exchange Act of 
1934 (``Exchange Act''), require that material information about 
certain transactions be communicated to investors prior to execution 
of the transaction. See, e.g., Exchange Act Release No. 33743 (Mar. 
9, 1994) [59 FR 12767, 12772 n. 49] (in proposing amendments to Rule 
10b-10 under the Exchange Act, which governs the duty of brokers to 
send confirmations of trades to clients, we stated that ``[t]he fact 
that a broker-dealer has met the requirements of Rule 10b-10 should 
begin the analysis, not end it. The confirmation is delivered after 
the contract is created. Thus, irrespective of the content of the 
confirmation, specific terms of the transaction that may affect the 
customer's investment decision should be disclosed at the time of a 
purchase or sale of a security.''). See also Radiation Dynamics, 
Inc. v. Goldmuntz, 464 F.2d 876, 891 (2d Cir. 1972) (court held 
that, for purposes of insider trading liability under Rule 10b-5 
under the Exchange Act, the time of a ``purchase or sale'' of 
securities is determined by reference to when the parties are 
obligated to perform the terms of the transaction, not when final 
performance occurs.).
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    a. Obtaining pre-execution consent. Because of market movements, an 
adviser may not be able to provide its client with a final execution 
price, or best price or final commission charges as contemplated by 
Release Nos. 40, 470 and 557 when soliciting pre-execution consent to 
an agency or a principal transaction. In these circumstances, however, 
an adviser should provide comparable information that is sufficient to 
identify and explain the potential conflicts of interest arising from 
the capacity in which the adviser is acting, that is as principal or 
agent, when engaging in or effecting a Section 206(3) transaction. For 
instance, prior to obtaining pre-execution consent, an adviser could 
transmit to the client the current quoted price for a proposed 
transaction, and, if applicable, current best price information \15\ 
and proposed commission charges. Under these circumstances, because the 
client has been informed about the potential conflicts of interest, and 
can refuse to consent to a proposed transaction before it is executed, 
the adviser has satisfied its disclosure obligation under Section 
206(3).
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    \15\ Consistent with its obligations under Section 206(3), an 
adviser, in lieu of disclosing best price information, could 
undertake to its client to match or better the best price in the 
market at the time that the adviser receives the client's consent.
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    b. Obtaining post-execution, pre-settlement consent. In our view, 
in order for a post-execution, pre-settlement consent mechanism to 
comply with Section 206(3), it must serve the purposes underlying 
Section 206(3). We believe that a post-execution, pre-settlement 
consent mechanism would satisfy the requirements of Section 206(3) if 
it provides both sufficient information for a client to make an 
informed decision, and the opportunity for the client to consent to a 
Section 206(3) transaction.
(i) Sufficiency of Information
    When soliciting a client's post-execution, pre-settlement consent 
to a Section 206(3) transaction, an adviser should be able to provide 
the client with sufficient information regarding the transaction, 
including information regarding pricing, best price and final 
commission charges, to enable the client to make an informed decision 
to consent to the transaction. In our view, if after execution but 
before settlement of a Section 206(3) transaction, an adviser also 
provides a client with information that is sufficient to inform the 
client of the conflicts of interest faced by the adviser in engaging in 
the transaction, then the adviser will have provided the information 
necessary for the client to make an informed decision for purposes of 
Section 206(3).\16\
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    \16\ As stated above, in three earlier releases, we or our staff 
have identified certain categories of relevant information that 
advisers may be required to disclose to identify these potential 
conflicts of interest when executing principal or agency 
transactions with advisory clients. See n.9 and n.12, supra.
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(ii) Client's Ability to Withhold Consent
    One of the concerns cited by Congress when enacting Section 206(3) 
was the practice of advisers placing unwanted securities in client 
accounts.\17\ An adviser that executes a transaction before obtaining 
its client's consent must ensure that its client understands that the 
client is under no obligation to consent to the transaction. In our 
view, post-execution, pre-settlement consent generally would be 
effective in addressing the concerns underlying Section 206(3), so long 
as the adviser has not structured the procedures for obtaining consent 
in such a manner that the client has no choice but to consent.\18\
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    \17\ See n.5 and accompanying text, supra.
    \18\ We understand that, prior to Piper Capital, some advisers 
seeking to comply with Section 206(3) generally disclosed to their 
clients, before effecting or engaging in any principal or agency 
transactions, that the adviser would be engaging in the transactions 
with its clients in the course of providing advisory services to the 
clients. Prior to the settlement of a specific Section 206(3) 
transaction, these advisers would provide their clients with the 
prices at which transactions were executed and, if applicable, best 
price information. Some of these advisers appear to have interpreted 
Section 206(3) as not requiring an adviser to bear any loss in the 
value of securities involved in a principal or agency transaction 
between the time of execution and the time of client consent. These 
advisers followed the practice of conditioning a client's refusal to 
provide post-execution, pre-settlement consent on the client's 
incurring any loss in the value of the securities between the time 
of execution and the client's refusal to consent to the transaction. 
Although we agree that Section 206(3) by its terms does not require 
that an adviser engaging in or effecting a principal or agency 
transaction with a client bear any loss in value of the securities, 
we seriously question whether a consent mechanism that conditions a 
client's refusal to provide post-execution, pre-settlement consent 
on the client's incurring any loss in the value of the securities is 
consistent with our interpretation of Section 206(3). In such a 
case, it appears to us that the consent procedure could, in effect, 
undermine the client's right to choose whether or not to consent to 
a Section 206(3) transaction.

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III. An Investment Adviser is not ``Acting as Broker'' With Respect 
to a Particular Agency Transaction Between Advisory Clients if the 
Adviser Receives No Compensation for Effecting the Transaction

    As stated above, Section 206(3) applies when an adviser, ``acting 
as broker for a person other than * * * [a] client,'' causes the client 
to buy or sell a security from that other person. The Advisers Act, 
however, does not define when an investment adviser is ``acting as 
broker'' with respect to a particular agency transaction.
    Industry representatives have raised questions with our staff about 
our interpretation of when an adviser is acting as broker for purposes 
of Section 206(3). In one settled enforcement action, we found that a 
portfolio manager caused an investment adviser to violate Section 
206(3) by failing to obtain client consent to an agency transaction 
between advisory clients,\19\ even though the adviser received no 
compensation (other than its advisory fee) for effecting the 
transaction.\20\ In Smirlock,\21\ a subsequent settled enforcement 
action involving similar circumstances, we made no finding that the 
portfolio manager caused the investment adviser to violate 206(3).
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    \19\ By the phrase ``agency transaction between advisory 
clients,'' we mean an agency transaction arranged by an investment 
adviser whereby one advisory client sells a security to a different 
advisory client of the investment adviser.
    \20\ See Balatsos, supra n.7 (the portfolio manager arranged an 
agency transaction between two advisory clients to ``reallocate'' 
newly issued securities prior to settlement after realizing that the 
selling client had previously instructed him to liquidate all of the 
holdings in its account before the later-than-anticipated settlement 
date of the securities).
    \21\ See Smirlock, supra n.7 (the portfolio manager directed an 
unaffiliated broker-dealer to effect agency transactions between 
advisory clients).
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    We have concluded that if an investment adviser receives no 
compensation (other than its advisory fee), directly or indirectly, for 
effecting a particular agency transaction between advisory clients, the 
adviser would not be ``acting as broker'' within the meaning of Section 
206(3).\22\ As we note above, it is primarily the incentive to earn 
additional compensation that creates the adviser's conflict of interest 
when effecting an agency transaction between advisory clients. This 
release confirms the interpretive position underlying the Smirlock 
Order.
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    \22\ Sections 206(1) and (2) of the Advisers Act impose a 
fiduciary duty on advisers with respect to their clients and a duty 
of full and fair disclosure of all material facts. See n.11, supra. 
Thus, even though an adviser may not be ``acting as broker'' within 
the meaning of Section 206(3), Sections 206(1) or (2) may require 
the adviser to disclose information about agency transactions that 
are not subject to Section 206(3).
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IV. Conclusion

    For the reasons discussed above, we are clarifying, only for 
purposes of Section 206(3) of the Advisers Act, that: (1) the phrase 
``before the completion of such transaction'' means prior to settlement 
of the transaction; and (2) an investment adviser is not ``acting as 
broker'' if the adviser receives no compensation (other than its 
advisory fee) for effecting a particular agency transaction between 
advisory clients.\23\
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    \23\ To the extent that the positions expressed in this release 
are inconsistent with earlier positions, such as those announced in 
Piper Capital and Balatsos, those earlier positions are superseded. 
For example, in a staff no-action letter, Salomon Brothers Asset 
Management, Inc (available Oct. 10, 1990) (``Salomon Brothers''), 
our staff took the position that Section 206(3) applied to agency 
transactions in certain tax-exempt securities effected by an adviser 
even though the adviser would receive no compensation for effecting 
the transactions. This release also supersedes that position taken 
by the staff in Salomon Brothers.
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V. Effective Date

    The Administrative Procedure Act (``APA'') establishes procedures 
for agency rulemaking. Section 551 of the APA defines a ``rule'' to 
include an ``agency statement of general or particular applicability 
and future effect designed to implement, interpret, or prescribe law or 
policy * * *'' \24\ The Small Business Regulatory Enforcement Fairness 
Act of 1996 (``SBREFA'') requires that all final agency rules, as 
defined by Section 551 of the APA, be submitted to Congress for review 
and requires generally that the effective date of a major rule be 
delayed sixty days pending Congressional review. A major rule may 
become effective at the end of the sixty-day review period, unless 
Congress passes a joint resolution disapproving the rule.\25\ Because 
this release is an agency statement designed to interpret the law, and 
because it does not fall within one of three exceptions to the 
definition of a rule for purposes of SBREFA, we have concluded that it 
is a rule for purposes of SBREFA.\26\
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    \24\ 5 U.S.C. 551(4).
    \25\ Pub. L. No. 104-121, Title II, 100 Stat. 857 (1996). Under 
SBREFA, a rule is ``major'' if it is likely to result in (1) an 
annual effect on the economy of $100 million or more, (2) a major 
increase in costs or prices for consumers or individual industries, 
or (3) significant adverse effects on competition, investment, or 
innovation. 5 U.S.C. 804(2).
    \26\ 5 U.S.C. 804(3)(A)--(C) (exceptions to the definition of a 
``rule'' for purposes of SBREFA).
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    The first interpretive position in this release regarding the 
points at which an adviser may obtain client consent to a Section 
206(3) transaction will become effective September 21, 1998. The Office 
of the Management and Budget (``OMB'') has determined that this first 
interpretive position is a ``major'' rule under Chapter 8 of the 
APA,\27\ which was added by SBREFA. The second interpretive position in 
this release regarding transactions for which an investment adviser 
would not be ``acting as broker'' within the meaning of Section 206(3) 
will become effective July 23, 1998. OMB has determined that this 
second interpretive position is a ``minor'' rule under SBREFA.
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    \27\   5 U.S.C. 801
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List of Subjects in 17 CFR Part 276

    Securities.

Amendments to the Code of Federal Regulations

    For the reasons set forth above, the Commission is amending Title 
17, Chapter II of the Code of Federal Regulations as follows:

PART 276--INTERPRETATIVE RELEASES RELATING TO THE INVESTMENT 
ADVISERS ACT OF 1940 AND THE GENERAL RULES AND REGULATIONS 
THEREUNDER

    Part 276 is amended by adding Release No. IA-1732 and the release 
date of July 17, 1998, to the list of interpretative releases.

    By the Commission.

    Dated: July 17, 1998.
Jonathan G. Katz,
Secretary.
[FR Doc. 98-19565 Filed 7-22-98; 8:45 am]
BILLING CODE 8010-01-P