Last month, the Securities and Exchange Commission (SEC) Office of Compliance Inspections and Examinations (OCIE) issued a risk alert with information concerning common deficiencies in investment advisers’ compliance with their best execution obligations under the Investment Advisers Act of 1940 (the “Advisers Act”).
Under the Advisers Act, investment advisers (“advisers”) have fiduciary duties including the responsibility to seek to obtain the “best execution” of client securities transactions. We have discussed other fiduciary duties imposed on advisers in the trillion-dollar retirement plan market and the SEC’s proposed Regulation Best Interest covering fiduciary duties of broker-dealers and their associated persons here. What the fiduciary duty of “best execution” under the Advisers Act means is advisers must execute client transactions in ways that make clients’ total costs or proceeds the most favorable under the circumstances.
During its investigations and examinations of advisers, OCIE found deficiencies such as the following:
- Failure to perform best execution reviews. Advisers did not conduct an evaluation of best execution when selecting a broker-dealer or could not demonstrate, through documentation or otherwise, that they had done so.
- Failure to consider materially relevant factors in best execution reviews, when performed. Advisers did not evaluate qualitative factors relating to the broker-dealers they chose, including the broker-dealers’ financial responsibility and responsiveness; nor did advisers solicit input from their traders and portfolio managers.
- Failure to fully disclose best execution practices. Some advisers, contrary to statements in their brochures, did not review trades to ensure that prices fell within an acceptable range.
- Inadequate best execution policies and procedures. Advisers had no best execution policies, failed to monitor broker-dealer performance, and did not take into account the type of securities traded.
- Failure to follow best execution policies and procedures, when in place. Advisers did not follow their own internal policies with respect to seeking comparisons or monitoring the execution prices of broker-dealers.
- Failure to seek comparative offers from other broker-dealers. Advisers utilized single broker-dealers for all their clients based solely on cursory reviews or brief summaries of services without seeking comparisons from other broker-dealers.
Many actions resulted from the OCIE staff observations above, including advisers amending their disclosures or otherwise changing their practices regarding best execution. The full list of deficiencies the OCIE identified in its risk alert (4 pages) is here.
Article by Jesse Hudson