Best Execution, Soft Dollar, Trade Allocation and Proxy Voting Compliance Reviews

Best Execution

As an investment adviser, your firm has a fiduciary duty to attempt to achieve best execution for your clients. This means RIAs must execute transactions for clients in a manner that the clients’ total costs or proceeds in each transaction are most favorable under the circumstances. While Bates Compliance recommends on-going reviews of executing broker-dealers, it is important to conduct a best execution and due diligence review of all broker-dealers at least on an annual basis when your firm directs client trades. This is especially true for those that use only one or two recommended broker-dealers and even when those are large, reputable broker-dealers.

In evaluating best execution, Bates Compliance will review the following:

  • Execution capabilities including the ability to handle trades and answer
  • Execution quality
  • Calls in a volatile market
  • Commission rates
  • Financial responsibility
  • Value of research or brokerage provided
  • Technology provided
  • Willingness, ability, facilities and infrastructure to work with RIAs
  • Administrative resources
  • Responsiveness
  • Pricing for services provided

It is also important to note that regulators have indicated that best execution is not determined by just the lowest possible commission costs but by the best qualitative execution. Therefore, it is necessary to conduct a qualitative review of broker-dealers used. Firms should systematically and periodically evaluate broker-dealers used, along with other broker-dealers to ensure that the firm’s recommended best execution services are optimal.

Bates Compliance can assist you in meeting these requirements and demonstrating how the review was completed.

Trade Allocation

The allocation of advisory transactions has and continues to be one of the biggest risk areas for advisory firms. This has especially been the case for advisers with performance based fees or proprietary account trading side by side with non-performance based fee accounts.

A strong and comprehensive trade allocation policy can go a long way towards mitigating your firm’s risk, by helping ensure that allocations are made in a fair and equitable manner for all clients. Full and accurate disclosure of these allocation policies and practices and the maintenance of adequate books and records are just as important, particularly as the SEC’s Enforcement Division has stepped up its efforts to mitigate cherry-picking in recent years.