Agency Cross Transactions
Now that you understand the basic prohibited practices, let's examine two specific transaction types that create inherent conflicts of interest for investment advisers. First: agency cross transactions.
Definition
- An agency cross transaction occurs when an investment adviser (IA) (or a person controlling, controlled by, or under common control with the IA) acts as a broker-dealer (BD) for both the advisory client and another person on the other side of the same transaction
- The IA is simultaneously advising one party and executing the trade as broker for both
- When acting in this dual capacity, the person must be registered as a broker-dealer (unless excluded from the definition)
Six Conditions for Permissible Agency Cross Transactions
Agency cross transactions are permitted only when all six conditions are met:
| # | Condition | Details |
|---|---|---|
| 1 | Written consent | Client must execute written consent prospectively (in advance) authorizing the IA to effect agency cross transactions |
| 2 | Full written disclosure before consent | Before obtaining consent, the IA must disclose: (a) the IA will act as BD for both sides, (b) the IA will receive commissions from both sides, and (c) the IA has a potentially conflicting division of loyalties |
| 3 | Written confirmation per transaction | At or before completion of each transaction, the IA must send written confirmation including: nature of transaction, date, offer to provide time on request, and source/amount of any other remuneration |
| 4 | Annual disclosure statement | At least annually, send each client a statement showing total number of agency cross transactions and total commissions/remuneration received |
| 5 | Right to revoke | Every written disclosure and confirmation must include a conspicuous statement that the client may revoke consent at any time by written notice |
| 6 | No dual recommendation | The IA may NOT recommend the same transaction to both the buyer and the seller |
Continuing Obligations
Even when all six conditions are satisfied:
- The IA must still act in the client's best interests
- The IA must still obtain the best price and execution
- All other disclosure obligations under the Act remain in effect
Exam Tip: Gotchas
- Meeting the six conditions does not waive the duty of best execution. The IA remains a fiduciary and must still get the best available price for the client. The conditions unlock the dual-capacity trade; they do not lower the standard of care.
Key Takeaway: Prospective (Blanket) Consent
The critical feature of agency cross transactions is that the client's written consent is prospective: it is given once in advance and covers future transactions. The IA does not need per-transaction consent (but does need per-transaction written confirmation).
Exam Tip: Gotchas
- Condition #6 prohibits dual recommendations. The IA cannot recommend the same transaction to both the buyer and the seller. The IA may execute a cross transaction where one side initiates, but cannot advise both parties to enter the same trade.
- Prospective (blanket) consent works for agency cross transactions but NOT for principal transactions. Do not mix these up.