Under the Investment Advisers Act, investment advisers selecting broker-dealers for executing client trades have an obligation to seek to obtain “best execution” of those transactions. The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) issued a new risk alert highlighting many of the most common deficiencies that the OCIE staff has cited in recent examinations of advisers’ compliance with their best execution obligations.
Best execution requires taking the circumstances of the particular transaction into consideration. A best execution analysis is whether the transaction represents the best qualitative execution for the client, rather than whether the transaction has the lowest possible commission cost. In directing brokerage, an adviser should consider the full range and quality of a broker-dealer’s services including:
- the value of research provided,
- execution capability,
- commission rate,
- financial responsibility, and
- responsiveness to the adviser.
It’s not just the cost. But be sure, that OCIE will look at the cost first, and it’s likely the adviser will have to justify using a higher cost.
The OCIE alert highlights the top eight issues their staff encounters during exams:
- Failure to perform best execution reviews
- Failure to consider materially relevant factors during best execution reviews
- Failure to seek comparisons from other broker-dealers
- Failure to fully disclose best execution practices
- Failure to disclose soft dollar arrangements
- Failure to properly administer mixed use allocations
- Failure to implement best execution policies and procedures
- Failure to follow best execution policies and procedures
Sources:
- Compliance Issues Related to Best Execution July 11, 2018
