On episode 49 discuss the frequently cited deficiencies cited during routine exams, surround the importance of best execution reviews.
CCO Buzz: Hello and welcome back! On this week’s episode of the CCO Buzz, we’re here to discuss Best Execution alongside SEC expectations. There’s a lot to cover so let’s get started.
In July 2018 the Securities and Exchange Commission released a Risk Alert on best execution deficiencies that were frequently cited during routine exams. Surprisingly, the first deficiency on the list entailed that firms were not performing best execution reviews. However, in reading the summary for this one, the SEC stated that firms were unable to “demonstrate” performing the reviews “through documentation or otherwise.” Lack of documentation is a very common deficiency doled out by SEC examiners, since the usual position is that if not documented, it wasn’t done.
Let’s look at the other deficiencies listed in the Risk Alert:
- Not taking into account relevant factors during the review – best execution reviews need to take into account factors other than execution price. Examples include the services and benefits clients receive from brokers, along with their execution capability and financial strength. You also want to be sure and query your traders and portfolio managers for their opinions.
- Not seeking comparisons from other brokers – this is important to determine whether the services and costs are the best overall for clients.
- Inadequate disclosures – there are a number of potential conflicts surrounding trading and best execution that, when applicable to a firm, need to be disclosed. An example used by the SEC in the Risk Alert included not disclosing that certain groups of clients trade after others when trading the same security and how this can affect execution prices.
- Soft dollar issues – it’s very important to consider soft dollar arrangements when performing best execution reviews. In addition, firms are required to document their determination that the cost of the arrangement is still reasonable in light of the research and services being provided. Mixed used determinations have to be made if any of the research is also used for other purposes. For example, if a firm is using FactSet for research, but also obtaining data for marketing materials, it would be a mixed-use product. Disclosures in Form ADV on soft dollars is necessary in order for clients and prospects to understand how transactions costs are being allocated.
- And lastly, Weak policies and procedures – mainly the SEC is finding that firm’s best execution policies and procedures don’t match practices, but the Risk Alert noted that they also sited firms for not having any best execution policies and procedures.
Notably, the steps firms need to take in regards to best execution reviews will vary based on the size of the firm, the types of securities traded, and the counterparties used – among other things.
For all advisory firms, best execution starts at the beginning, before the trade is placed and flows through to post execution, and as noted above, there are a whole host of important factors that firms should also consider.
To view the SEC’s Risk Alert, visit www.sec.gov/ocie and if you have any questions or would assistance with your best execution review program, call us at (619) 278-0020 or visit us on the web at www.corecls.com. Thanks.
Well that’s it for this week’s episode. If you’d like additional information, please check out our website at www.corecls.com. You can also follow us on Facebook, LinkedIn or Twitter @CoreCLS. Thank you and we hope you tune into next week’s episode of the CCO Buzz.