There may be compelling and legally plausible reasons for a hedge fund manager to trade with one of its funds or accounts, but such a trading structure involves an inherent conflict of interest: the manager has a legal fiduciary duty to act in the best interests of its clients, but a presumptive desire to get the best deal for itself.  Section 206(3) of the Investment Advisers Act seeks to balance the potential value of principal trades and the inherent conflict – it permits such transactions, but subject to safeguards.  See “When and How Can Hedge Fund Managers Engage in Transactions with Their Hedge Funds?,” Hedge Fund Law Report, Vol. 4, No. 45 (Dec. 15, 2011).  A pair of recently settled enforcement actions clarifies the SEC’s perspective on principal transactions.  In particular, the actions speak to the circumstances in which principal transactions are and are not permissible, the policies and procedures that should govern such transactions, the practicability of blanket ex ante consent and similar dynamics.  This article describes the facts and analysis in the relevant SEC orders, and extracts four practical lessons for hedge fund managers from them.  See also “How Can Hedge Fund Managers Structure Their Compliance, Reporting and Disclosure Systems to Avoid Allegations of Principal Trading Rule Violations?,” Hedge Fund Law Report, Vol. 2, No. 36 (Sep. 9, 2009).