Section 206 of the Investment Advisers Act of 1940

Section 206 (15 U.S.C. § 80b-6) is the antifraud cornerstone of the Investment Advisers Act. It applies to every investment adviser, whether or not registered, and codifies the federal fiduciary duty an adviser owes to its clients. The Commission has adopted rules under § 206 to address specific manifestations of fraudulent or deceitful conduct (for example, Rules 206(4)-1 through 206(4)-8 and Rule 204A-1).

(a) Statutory text — abbreviated.

It shall be unlawful for any investment adviser, by use of the mails or any means or instrumentality of interstate commerce, directly or indirectly:

1. To employ any device, scheme, or artifice to defraud any client or prospective client; 2. To engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client; 3. 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. The prohibitions of this paragraph (3) shall not apply to any transaction with a customer of a broker or dealer if such broker or dealer is not acting as an investment adviser in relation to such transaction; and 4. To engage in any act, practice, or course of business which is fraudulent, deceptive, or manipulative. The Commission shall, for the purposes of this paragraph (4), by rules and regulations define, and prescribe means reasonably designed to prevent, such acts, practices, and courses of business as are fraudulent, deceptive, or manipulative.

(b) The federal fiduciary standard.

The Supreme Court in SEC v. Capital Gains Research Bureau, 375 U.S. 180 (1963), held that § 206 establishes a federal fiduciary standard for investment advisers. The Commission's 2019 Interpretation Regarding Standard of Conduct for Investment Advisers (Release IA-5248) articulates the standard as comprising:

1. **A duty of care**, including the duty to provide advice that is in the best interest of the client (taking into account the client's investment profile), to seek best execution of client transactions when the adviser has the responsibility to select broker-dealers, and to provide advice and monitoring over the course of the relationship; and 2. **A duty of loyalty**, including the duty to make full and fair disclosure of all material facts relating to the advisory relationship, particularly all material conflicts of interest, in a manner that the client can make an informed decision whether to provide informed consent.

The standard is principles-based and is not limited by, or co-extensive with, the rules adopted under § 206. Practices that comply with a specific rule may nevertheless violate the broader fiduciary standard.

(c) Principal trades and § 206(3).

Section 206(3) imposes a per-transaction disclosure-and-consent requirement when an adviser, acting as principal, transacts with a client. The requirements are:

1. Pre-trade written disclosure of the capacity in which the adviser is acting; and 2. Pre-trade client consent.

Practitioners often refer to "blanket" or "standing" consents — but a blanket consent obtained at account opening does not generally satisfy § 206(3). Each principal transaction generally requires a separate consent. Limited exceptions exist under Rule 206(3)-3T (the temporary non-pooled-account principal-trade rule, since extended) and under the investment-company exemption.

(d) Agency cross transactions and § 206(3)(2).

Where the adviser acts as broker for both sides of a cross transaction between clients, Rule 206(3)-2 establishes a safe harbor that requires:

- Written client consent (which may be a blanket prospective consent); - Annual statement to the client identifying the agency cross transactions effected and the source and amount of any compensation; - Confirmation of each transaction setting forth the source and amount of any compensation; and - Adviser is acting only as agent (not as principal) to either side.