On July 11, 2018, the SEC’s Office of Compliance Inspections and Examinations (OCIE) issued a National Exam Program Risk Alert (“Risk Alert”) that summarizes its findings from over 1,500 investment adviser examinations. Best execution analysis and monitoring has long been a challenge for investment advisers due to the lack of control over the execution process itself. Broker-dealers conduct trade execution, not the investment adviser, so access to execution data may be difficult to obtain,
Despite the existing challenges, the SEC’s position is that the adviser has a fiduciary obligation to ensure that all client transactions are conducted in a manner to provide for best execution. The guidance offered in the Risk Alert shows what not to do without providing positive examples of successful best execution practices. This is a departure from earlier guidance on examination findings, where both positive and negative examples were described.
Deficiency types found and highlighted in the Risk Alert include:
- Advisers not performing best execution reviews at all
- Inadequate reviews that did not consider execution capability, financial responsibility, or responsiveness to the adviser
- Reviews that did not consider feedback from traders and portfolio managers
- Lack of comparisons among broker-dealers or relying on a single broker for a majority of transactions without thorough documentation of execution due diligence on the broker
- Weak best execution disclosures on Form ADV
- Lack of disclosure language regarding soft dollar arrangements that cause unequal distribution of costs among clients, as well as poor disclosure of research product or services utilized that fall outside of the Section 28(e) safe harbor
- Advisers not making proper allocations regarding mixed use items, and lack of support and documentation for mixed use items
- Poor written policies and procedures regarding best execution
- Advisers not following written policies
OCIE issued this Risk Alert to provide guidance to the investment adviser industry on what to look for and consider when reviewing best execution practices.
