Examination of Advisers’ Practices for Principal and Cross Trades Involving Fixed Income Securities

July 26th | 2021

The Division of Examinations (the “Division”) of the Securities and Exchange Commission (“SEC”) conducted extensive examination of advisers’ practices for principal and cross trades involving fixed income securities. The Division focuses on principal and cross trades related to conflicts of interest, adherence to the “Compliance Rule” and the adequacy of disclosures. If you are an adviser to clients regarding fixed income securities, the Division’s observations provide valuable insights regarding your fiduciary obligations. Here is a link to the principal trades and cross trades risk alert.

The Division observed extensive deficiencies related to compliance program policies and procedures citing the following issues:

• Polices and procedures that were inconsistent with advisers’ practices, its disclosures and/or regulatory requirements.
• Policies and procedures that lacked certain considerations or guidance, such that the examined advisers’ personnel did not have the full scope of information that may be necessary to achieve compliance.
• Policies and procedures that were not effectively tested related to principal and cross trades.
• Failure to provide adequate written disclosures.

The Division provided observations regarding compliance programs that appeared to be effective in their risk alert. Following the guidelines provided by the Division will provide a solid foundation for adequate compliance program development. Review your written compliance policies and procedures to ensure that your fixed income principal and cross trades adhere to all applicable regulatory requirements.