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On July 11, 2018, the SEC issued a Risk Alert outlining commonly found compliance issues related to best execution by investment advisers.
Advisers have an obligation to seek best execution of client transactions, taking into consideration quantitative factors such as execution quality and commission rate, as well as more qualitative factors such as the value of research provided and responsiveness to the adviser. There is no single determinative factor in broker selection; rather, an adviser should seek to obtain in all transactions the best execution for the client account.
Advisers must systematically and periodically review execution quality and maintain documentation to that effect.
The most common compliance issues related to best execution include:
- Failure to perform best execution reviews – Advisers either did not periodically and systematically evaluate best execution or they failed to maintain documentation to evidence such evaluation
- Failure to consider materially relevant factors during best execution reviews – Advisers did not consider the full range and quality of a broker-dealer’s services (e.g. not incorporating qualitative factors or not seeking input from the trading desk)
- Failure to seek comparisons from other broker-dealers – Advisers utilized certain broker-dealers without seeking out or considering the quality and costs of services available from other broker-dealers
- Failure to fully disclose best execution practices – Advisers did not provide full disclosure of best execution practices (e.g. not disclosing that certain types of client accounts may trade the same securities after other client accounts and the potential impact of this practice on execution prices)
- Failure to disclose soft dollar arrangements – Under Section 28(e) of the Securities Exchange Act of 1934 (the “Exchange Act”), an adviser may pay more than the lowest commission rate in soft dollar arrangements without breaching its fiduciary obligation, provided that certain specified conditions are met. Some advisers failed to provide full and fair disclosure of soft dollar arrangements (e.g. certain clients may bear more of the cost of soft dollar arrangements than other clients or arrangements where products and services were acquired that did not qualify as eligible brokerage and research services under Section 28(e))
- Failure to properly administer mixed use allocations – Advisers did not appear to make a reasonable allocation of the cost of a mixed use product or service according to its use or did not produce support, through documentation or otherwise, of the rationale for mixed use allocations
- Failure to implement or follow best execution policies and procedures – Advisers appeared to have inadequate compliance policies and procedures or internal controls regarding best execution or failed to follow policies and procedures (e.g. commitments to monitor and review best execution on an ongoing basis)
TradeSentry is a post-trade compliance and trade surveillance solution covering everything from best execution review to insider trading detection. TradeSentry can enable your compliance team to:
- Monitor execution performance by account, broker, or trading venue using transaction cost analysis
- Analyze trading volumes, commissions, and fees for executing brokers
- Compare soft-dollar broker performance to hard-dollar broker performance
- Benchmark execution quality with access to industry-leading reference data from Markit TCA™ for equity, fixed-income and foreign exchange
- Collaborate with traders and portfolio managers directly in the tool – no more fragmented email chains
- Create best execution compliance reports for Rule 206(4)-7 annual testing
TradeSentry is secure, cloud-based and backed by years of Ascendant experience in the field.
Tackle your trading compliance challenge systematically with TradeSentry by scheduling a demo today.
About Ascendant Services
Ascendant’s experienced consultants can review your firm’s best execution policies and procedures as part of an annual review engagement, assisting you in identifying any gaps or material risks.
For more information, contact email@example.com or call (860) 435–2255.
Post written by Brian DeDonato & Kelley Merwin
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CSS frequently publishes blog posts which are written by our team from their observations in the field, at conferences and through experiences with compliance professionals. These posts are designed to further knowledge and share industry best practices. Topics run the gamut, including Form ADV, cybersecurity, MiFID II, position limit monitoring, technology challenges and more. Complete and submit the brief form below to receive notifications when we publish new content.