Another Hurdle Disappears


New York, NY – According to an article published in the September 17th issue of the Wall Street Letter,  the SEC is expected to give broker-dealers the freedom to conduct principal trades with clients without having to get written consent. 

Apparently, the SEC move is a temporary measure meant to address a U.S. Court of Appeals decision which currently requires written trade by trade consent when an investment advisor conducts principal trades from their own inventory. 

The SEC proposed indicates that broker-dealers that must also register as investment advisors only need to get written consent from their clients just once.  This proposal will likely be approved by the Commission at its meeting next Wednesday.  The SEC is still expected to publish its proposal for a permanent solution to this issue in the coming months.

This has become an important issue to investment banks as the elimination of the Merrill Rule (which lapses on October 1, 2007) prompted many banks to wonder how they would continue their lucrative proprietary trading operations if they were also forced to meet the fiduciary obligations associated with registering as investment advisors.

It is interesting to note that in the past a number of investment banks have argued that they cannot receive cash payments for their research due to the fact that this might require them to have to become investment advisors — a move that would limit their ability to conduct principal trades with their clients.

Does this mean that buy-side clients will be able to require their sell-side reseach providers to accept checks for their research if they want to pay them this way?  The jury is still out on this issue.


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