OCIE Releases List of Most Common Best Execution Issues Cited in Adviser Exams

July 18, 2018

OCIE Releases List of Most Common Best Execution Issues Cited in Adivser Exams

WHAT HAPPENED?

On July 11^th, 2018, the Office of Compliance Inspections and Examinations (OCIE) released a risk alert outlining the most common deficiencies cited in adviser examinations regarding best execution obligations.  The risk alert summarizes issues identified in deficiency letters from over 1,500 adviser examinations.

The most frequent best execution issues include:

1. Failing to perform a best execution review – OCIE staff found that advisers could not confirm the implementation of periodic reviews of broker-dealer performance and client transactions.
2. Ignoring relevant factors during best execution review – OCIE staff found that advisers did not use any qualitative factors when evaluating broker-dealers’ “execution capability, financial responsibility and responsiveness to the adviser.” In addition, trader and portfolio manager feedback was not requested or reviewed.

3. Failing to compare with other broker-dealers – OCIE staff observed advisers to be using broker-dealers without comparing or considering other broker-dealers.

4. Insufficient disclosures – OCIE staff noticed advisers were not providing appropriate or adequate disclosures of best execution practices.

5. Soft dollar concerns – OCIE staff found advisers to be participating in soft dollar arrangements without the appropriate disclosures in Form ADV.

6. Improperly handling mixed use allocations – OCIE staff noticed advisers failing to allocate costs fairly or failing to provide the appropriate documentation to support the explanation for mixed use allocations.

7. Lacking policies and procedures – OCIE staff found advisers to have inadequate compliance programs. Policies and procedures were either nonexistent or insufficient.  Advisers were also found directly evading their best execution policies and procedures.

WHAT DOES THIS MEAN FOR ME?

Under the Investment Advisers Act of 1940 (“The Advisers Act”), registered investment advisers have a fiduciary duty to maintain “best execution” of client transactions.  Best execution can be obtained by considering the circumstances of a transaction in such a manner that the client’s interests are the most auspicious.  In directing brokerage, advisers should consider their quality of services, including the value of research and their execution capability.

Fairview is committed to answering any questions or concerns regarding the conclusions of OCIE Risk Alert and will be working with clients to ensure best execution practices are compliant and in accordance with their fiduciary duty.  In addition, Fairview assists clients in preparing meeting materials and documenting best execution review in a manner consistent with best practices.

Sources: https://www.sec.gov/ocie/announcement/risk-alert-most-frequent-best-execution-issues-cited-adviser-exams-1

https://www.sec.gov/files/OCIE%20Risk%20Alert%20-%20IA%20Best%20Execution.pdf