What Is an Agency Cross?
An agency cross is a transaction in which an investment adviser acts as the broker for both their client and the other party to the transaction. Investment advisers are not required to obtain the client's consent for each individual agency cross transaction, but must have the client's prior consent to engage in such transactions.
Agency Cross Explained
As in all transactions, advisers still are required to obtain the best possible price and execution in agency cross transactions. If an affiliate of the adviser brokers such a transaction, it is still considered an agency cross transaction, just as if the adviser had brokered it. Agency cross transactions are governed by Rule 206(3)-2 of the Investment Advisers Act of 1940.
Agency Cross vs. Principal Transaction
With an agency cross transaction, an adviser works a trade between different advisory clients. In another type of agency transaction, an adviser arranges a trade between an advisory client and a brokerage customer. And in a principal transaction, an adviser — acting on their own behalf — buys a security from and sells a security to a client's account.
Agency Cross and Compliance
Regulators keep a close eye on compliance with Rule 206(3)-2 in agency transactions, as they create potential for self-dealing by advisers. In particular, an agency cross can be used by an unscrupulous financial adviser to earn additional compensation.
According to the Securities and Exchange Commission, compliance with Rule 206(3)-1 requires the following:
- The advisor's client must give written consent to authorize agency cross transactions prior to them happening. That consent must come after full written disclosure by the adviser that they (or another person) will act as a broker for, get commissions from, and have a potential conflict of interest with regard to both parties in the transaction.
- The adviser must notify in writing each client at or before the completion or any transaction that includes a statement about the nature of the transaction, the date it happened, an offer to provide the time the transaction took place, and how much they received or will receive in any remuneration, as well as its source.
- The adviser is required to send each client an annual statement that includes the number of agency cross transactions since the last statement, as well as the total sum of remuneration they received or will receive. Each statement must clearly state that the client's consent may be revoked at any time.