Compliance and Regulatory Alerts - 07-19-18
Alert: Common “Best Execution” Deficiencies in Recent Examinations
The SEC has highlighted frequent “best execution” deficiencies found in some recent examinations of investment advisers. As described in a new Office of Compliance Inspections and Examinations (“OCIE”) Risk Alert, investment advisers have a fiduciary obligation to seek “best execution” of client transactions. The Alert cites longstanding Commission guidance on the subject, which states that “the determinative factor [in an adviser’s best execution analysis] is not the lowest possible commission cost but whether the transaction represents the best qualitative execution for the managed account.”
The OCIE found a range of compliance deficiencies: investment advisers often failed to (i) conduct periodic or systematic reviews of broker-dealers' best execution performance; (ii) consider the costs and quality of services available from other broker-dealers; (iii) evaluate other “qualitative factors” such as “the broker-dealer’s execution capability, financial responsibility, and responsiveness to the adviser;” (iv) consider “materially relevant factors” during best execution reviews such as the “full range and quality of a broker dealer’s services in directing brokerage;” and (v) “solicit and review input from the adviser’s traders and portfolio managers.”
The OCIE also found failures to keep adequate books and records on allocations involving “soft-dollar” arrangements. Full and fair disclosure of these research and/or brokerage service arrangements is a requirement on Form ADV. In addition, OCIE found inadequate policies and procedures in place to assess best execution compliance, and that advisers often did not follow internal policies regarding the “ongoing monitoring of execution price, research, and responsiveness of their broker-dealers.”
The OCIE Alert cautions investment adviser firms to make sure that their compliance programs are reviewed and revised as necessary to ensure compliance with these best execution obligations.
For more information concerning Bates Compliance Solutions, including support to address best execution deficiencies, please contact us by phone at (503) 670-7772 or email Robert Lavigne, Managing Director, Bates Compliance Solutions at firstname.lastname@example.org.