On September 4, 2019, the SEC’s Office of Compliance Inspections and Examinations issued a Risk Alert addressing the most common compliance issues it identified in examinations of investment advisers related to principal and agency cross transactions.
The Risk Alert follows on the Interpretation Regarding Standard of Conduct for Investment Advisers (the “Interpretation”) issued by the SEC on June 5, 2019. Although the Interpretation stated that it did not create any “new legal obligations for advisers,” the Risk Alert cites to the Interpretation for the proposition that Advisers may need to do more than merely comply with the disclosure and consent provisions of the Investment Advisers Act of 1940 (“Advisers Act”) in order to ensure clients provide informed consent to principal and agency cross transactions. This position and the citation may well signal an increased focus in examinations as well as SEC Enforcement Division investigations on the specific disclosure and process followed by Advisers in obtaining consent coupled with a view that, in some instances, conflicts may not be capable of being addressed through disclosure or even consent.
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