When does a cross trade become a principal trade?
RIAs · Video 8 of 8 · 0:31 ·
When your firm and its affiliates own more than 25% of the fund on one side, SEC staff treat a trade between that fund and another client like trading for your own account: a principal trade. Principal trades need written disclosure and the client's consent before each trade is completed, plus written policies covering these trades.
Everything here is for educational purposes only and is not legal, tax or investment advice, or an offer to buy or sell any security. Laws and thresholds change and depend on your facts, so talk to a qualified attorney before acting.
Key facts
- Above 25% ownership of a fund by the adviser and affiliates, staff treat trades with it as principal trades.
- Advisers Act §206(3): written disclosure and client consent before completion of each principal trade.
- Written compliance policies should cover cross and principal trades.
Transcript
Founder: A cross trade just moves a position from one client to another. Easy.
Operator: Usually. Until your firm owns more than 25% of the fund.
Founder: Why would that matter?
Operator: Then trading with the fund can count as trading for your own account. That's a principal trade.
Operator: Principal trades need written disclosure and the client's consent, before each trade is completed.
Founder: Every single one?
Operator: Every one. Plus written policies covering these trades.
Founder: So watch the 25%.
Operator: Know where you are on it, before you trade.
Founder: Okay. A cross trade just moves a position...