Section 206 is part of the Investment Advisers Act of 1940. While the regulatory intricacies of this legislation can be complicated and difficult to understand, the Securities and Exchange Commission has published two interpretive positions that are likely to help those working in finance ensure compliance.
Ultimately, The act forbids investment bankers, either 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."
Of specific interest to financial institutions is Sec. 206(3), which forbids investment advisers from engaging in or carrying out transactions for clients while acting as principals for their own account or as brokers for someone other than their clients without disclosing that relationship to clients in writing and obtaining clients' consent. The fundamental goals of this regulation are:
Now, let's break down that regulation. First, it deals with the point at which advisors must obtain clients' consent for transactions if they are the principal or agency representative. Specifically, advisers are required to obtain their clients' consent to transactions covered under Sec. 206(3) before such transactions are made.
Second, this rule identifies the kinds of transactions not covered --- those for which the adviser is not considered an "acting broker" --- as those for which they receive no compensation for making the transaction on clients' behalf. Since the whole goal of the regulation is to ensure no unethical behavior is happening on the part of the investment adviser, removing compensation from the equation is an important distinction.
For advisers and transactions covered under the act, it's important to understand exactly what must be disclosed. The SEC clarifies that advisers must reveal potential conflicts of interest via a written disclosure of their acting capacity in the transaction. The SEC's clarifying document also recommends reading Sec. 206(3) in conjunction with 206(1) and 206(2). These additional sections impose:
Part of the impetus for the SEC's guidance on the matter was comments from industry representatives regarding the need for clarification on when exactly the disclosure and consent need to happen. The SEC clarified that it views "completion" as noted in Section 206(3) as "settlement" of a transaction, not "execution."
Securities transactions have various stages before they can be considered complete. "Settlement" refers to the actual exchange of securities and payment, whereas "execution" comes before that and refers to the contractual agreement between parties to the terms of the transaction.
It's clear that investment advisers need to not only provide disclosure in accordance with Section 206 but also obtain prior consent prior to settling transactions with clients. They must also ensure their record-keeping practices allow them to easily prove they are complying with this rule. Enter MirrorWeb, which helps organizations meet their digital compliance and preservation needs.
Let's say that you send a client a disclosure and request compliance electronically. MirrorWeb captures and archives exact copies of all electronic information --- including from emails and other digital communications --- for later retrieval. This lets you focus on what you do best --- providing clients with the financial services they need --- while spending less time worrying about capturing and archiving disclosures and signed consents.
Once signed up to use MirrorWeb, clients' data capture needs are evaluated and a capture schedule is devised. The company delivers:
