Quick Answer
An agency cross transaction happens when an investment adviser also acts as broker-dealer for both its advisory client and the other party to the same trade. It is permissible only with prospective written client consent, specific pre-consent disclosures, a written confirmation for each transaction, an annual summary, and a standing right to revoke. The adviser can never recommend the same trade to both sides.
An agency cross transaction is a narrow, heavily conditioned exception to the conflicts an adviser normally must avoid when it sits on both sides of a trade.
What Is an Agency Cross Transaction?
- An agency cross transaction occurs when an investment adviser, or a person controlling, controlled by, or under common control with the adviser, acts as a broker-dealer for both the advisory client and another person on the other side of the same transaction
- The adviser is simultaneously advising one party and executing the trade as broker for both parties
- The person acting in this dual capacity must be registered as a broker-dealer unless excluded from that definition
What Conditions Must Be Met for an Agency Cross Transaction to Be Permissible?
| # | Condition | Details |
|---|---|---|
| 1 | Written consent | The client must execute written consent prospectively (in advance), authorizing the adviser to effect agency cross transactions |
| 2 | Full written disclosure before consent | Before obtaining consent, the adviser must disclose in writing that it will act as broker-dealer for both sides, will receive commissions from both sides, and has a potentially conflicting division of loyalties |
| 3 | Written confirmation per transaction | At or before completion of each transaction, the adviser must send the client a written confirmation stating the nature of the transaction, the date, an offer to provide the time on request, and the source and amount of any other remuneration |
| 4 | Annual disclosure statement | At least annually, the adviser must send each client a statement showing the total number of agency cross transactions and the total commissions or 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 adviser may not recommend the same transaction to both the buyer and the seller |
Exam Tip: Gotchas
- Blanket consent works here, unlike principal transactions. An agency cross transaction only needs prospective (advance) written consent, not per-transaction consent. Contrast this with principal transactions, which require fresh written disclosure and consent before completion of every transaction.
- The dual-recommendation ban is the tested trap. The adviser may execute a cross where one side initiates the trade, but it cannot be the one advising both parties to enter the same transaction. A question describing the adviser recommending the trade to both the buyer and the seller describes a violation regardless of how well-disclosed the arrangement otherwise is.
Does an Agency Cross Transaction Relieve Any Other Duties?
- Nothing in the agency cross transaction conditions relieves the adviser from acting in the client's best interests, including obtaining the best price and execution
- The conditions do not relieve the adviser of any other disclosure obligations it owes under state securities law
What Should You Check on Exam Day?
- Agency cross transactions need prospective written consent, not a fresh written consent for every trade; principal transactions need the opposite.
- All six conditions (consent, pre-consent disclosure, per-transaction confirmation, annual statement, revocation right, no dual recommendation) must be present; missing any one makes the transaction improper.
- Best execution and other disclosure duties survive even when the agency cross conditions are satisfied.