Principal Transaction

A is correct. Principal transactions require written disclosure and client consent (written or oral acceptable) from the client before completion (settlement) of each transaction, regardless of whether the adviser has discretionary authority. Option B is incorrect because completing the trade first and disclosing afterward violates the "prior consent" requirement. Option C is incorrect because consent must be obtained before completion (settlement), not after execution. Option D is incorrect because disclosure must occur before the transaction settles, not in a quarterly statement afterward. Discretionary authority allows the adviser to decide which securities to buy or sell, but does not waive the consent requirement for principal transactions where the adviser has a direct conflict of interest.

B is correct. A principal transaction occurs when an investment adviser trades securities with a client from the adviser's own account, acting as principal (dealer) rather than agent. Option A describes an agency transaction, not a principal transaction. Option C is incorrect—"principal" refers to the capacity in which the adviser acts (as owner of the securities), not the importance of the client. Option D describes discretionary trading, which is a separate concept from principal transactions. The key distinction is that in a principal transaction, the adviser has ownership of the securities and is trading from their own inventory, creating an inherent conflict of interest.

B is correct. Trade 3 violated regulations because it represents an agency cross transaction (trading between two clients) which requires specific disclosure and consent procedures. Trade 2 was properly handled—obtaining written consent the previous Friday satisfies the "before execution" requirement for the principal transaction on Monday. Trade 1 is a normal agency transaction with no special requirements. Option A is incorrect because Trade 2 complied with regulations (consent was obtained before execution). Option C is incorrect because Trade 2 was proper. Option D is incorrect because Trade 3 involved an agency cross transaction that requires special handling.

C is correct (the exception). Investment advisers do NOT need approval from FINRA or state securities administrators before executing principal transactions—they need client consent. Options A, B, and D are all required: the adviser must provide written disclosure of their principal capacity (A), obtain client consent before the transaction settles (B), and disclose any conflicts of interest (D). While investment advisers must comply with securities regulations and may be subject to regulatory examinations, they do not need pre-approval from regulators for individual principal transactions. The consent of the client, properly obtained with full disclosure, is what makes the transaction permissible.

B is correct (II and III). Statement II is true: written disclosure must explain the adviser's capacity as principal in the transaction and any conflicts of interest. Statement III is true: consent must be obtained before executing each principal transaction, regardless of discretionary authority. Statement I is false: discretionary authority does NOT eliminate the consent requirement for principal transactions—consent is required for each transaction even when the adviser has discretionary control. Statement IV is false: while fair pricing is important, the fiduciary duty in principal transactions requires full disclosure and informed consent before execution, not just a fair price. The conflict of interest inherent in principal transactions means proper disclosure and consent procedures must be followed regardless of pricing.