SEC Office of Compliance Inspections and Examinations (“OCIE”) Issues Alert on Cross-Trades Under Investment Advisers Act

On September 4, 2019, the OCIE issued a Risk Alert on issues identified by the staff during audits of firms of cross-trades that violate the applicable rules.  Section 206(3) of the Investment Advisers Act effectively prohibits an adviser, acting as a principal or agent, from carrying out certain cross trades that would be the result of conflicts without full information to the clients and written client approval on a trade by trade basis.  Rule 206(3)-2, however, allows certain agency cross trades if the client has executed a blanket authorization after being fully informed, and the broker meets certain other requirements.  The Risk Alert highlights the fact that many advisers are not complying with the rules.  The Risk Alert warns advisers that this is a continued focus of OCIE.