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Advisers Failing Best Execution Compliance Obligations

The SEC’s Office of Compliance Inspections and Examinations (OCIE) issued a Risk Alert listing the most common deficiencies cited in recent examinations of advisers’ best execution obligations.  Reviewing over 1,500 exams, the OCIE staff highlighted advisers’ failures to (i) conduct any best execution reviews, (ii) consider qualitative factors (e.g. execution capability, responsiveness), and (iii) utilize multiple brokers or to compare execution quality against other brokers.  The OCIE staff also witnessed widespread failures to fully disclose best execution practices such as client preferences and soft dollar arrangements.  The staff reports that many advisers either had inadequate policies and procedures or failed to follow them.  The staff encourages advisers “to reflect upon their own practices, policies, and procedures in these areas and to promote improvements in adviser compliance programs.”

OUR TAKE:  In its recent fiduciary interpretation release, the SEC specifically identified best execution as core to an adviser’s fiduciary obligation.  As a core obligation, it concerns OCIE that they have identified pervasive compliance failures during examinations.  Ensuring a best execution review should be part of every compliance testing program.