What is the disclosure requirement associated with Principal Transactions?

The requirement for disclosure associated with Principal Transactions is that written disclosure must be provided to clients before the transactions take place. This is critical because Principal Transactions involve a firm trading in its own account, which creates a potential conflict of interest. The written disclosure informs clients of the nature of the transaction and the associated risks, ensuring that they have the necessary information to make an informed decision.

Providing this disclosure in writing prior to the transaction helps establish transparency and trust between the investment adviser and the client. It ensures that clients are fully aware of how their investments may be impacted by the adviser's actions, including any potential discrepancies in pricing or the adviser's intention in recommending the transaction.

Although verbal disclosures might be considered less formal and would not meet the standard requirements for clarity and record-keeping, written disclosures ensure that there is a documented understanding of the transaction and its potential implications. Requiring disclosures before the transaction also reinforces the importance of proactively addressing conflicts of interest, promoting a higher standard of conduct and compliance within the investment advisory industry.