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SEC Exam Unit Highlights Advisors’ Best Execution Failures

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The Securities and Exchange Commission released Wednesday its list of the most common infractions when examining advisors’ best execution compliance, with failure to disclose soft dollars making the list.

In its Risk Alert, the agency’s Office of Compliance Inspections and Examinations states that when selecting broker-dealers and executing client trades, advisors must seek to obtain “best execution” of client transactions, considering the circumstances of the particular transaction.

The alert notes the agency’s stance that “the determinative factor [in an advisor’s best execution analysis] is not the lowest possible commission cost but whether the transaction represents the best qualitative execution for the managed account.”

Advisors, the alert advises, should “periodically and systematically evaluate the execution quality of broker-dealers executing their clients’ transactions.”

OCIE found that advisors not only failed to perform best execution reviews but that they also failed to consider “materially relevant factors” during best execution reviews, including not considering the full range and quality of a broker-dealer’s services in directing brokerage.

Advisors also failed to elicit comparisons from other broker-dealers, with OCIE noticing that advisors utilized certain broker-dealers “without seeking out or considering the quality and costs of services available” from other broker-dealers.

While some advisors did not have adequate best execution policies and procedures, others failed to disclose their best execution practices, the alert states.

For instance, examiners observed advisors that did not disclose 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.

Failing to disclose soft-dollar arrangements, including providing “full and fair disclosure” on Form ADV, was also cited.

OCIE found that advisors did not adequately disclose the use of soft-dollar arrangements, did not disclose that certain clients may bear more of the cost of soft-dollar arrangements than others, and did not appear to provide adequate or accurate disclosure regarding products and services acquired with soft dollars that did not qualify as eligible brokerage and research services.

— Check out FINRA to Take Over Review of Public Records for Broker Hires on ThinkAdvisor.


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