SEC Exam Best Execution Issues

On Jul. 11, SEC issued alert on best execution issues in adviser exams.

  • Described common best execution findings, cited in deficiency letters sent to IAs.

Fiduciary Standardu

  • Advisers Act has established a federal fiduciary standard for investment advisers.
  • To seek to obtain best execution of client trades based on facts and circumstances.
  • When directing brokerage, consider full range, quality of broker-dealer’s services
    value of research, execution ability, commission, financial terms, responsiveness.

Soft Dollar Arrangements

  • Value impacted by IA receipt of brokerage and research services, adviser may pay
    more than lowest commission rate in soft dollar deal, without breaching fiduciary.
  • As per SEA Section 28(e), include more detailed disclosure on such arrangements.

Compliance Review Issues

  • IA could not demonstrate their periodic or systematic evaluation of best execution performance evaluation of brokers, no paperwork to demonstrate that it happened.
  • Or no consideration of all material factors, nor evaluate qualitative factors for BDs.
  • Did not considering quality and cost of services available from other broker-dealers.

Disclosure Issues

  • Not disclosing soft dollar terms fully and fairly on Form ADV, how clients bear cost.
  • Nor general disclosures, of how type of client accounts may trade same securities
    after another client accounts, and potential impact of practice on execution prices.

Policies and Procedures

  • Inadequate compliance policies and procedures, internal control, failure to monitor.
  • Some did not follow own policy and procedure on best execution, reviews, allocate.