SEC Levies $1.5 Million in Penalties for Best Execution Process Failures
Two dually-registered investment advisers agreed to pay substantial disgorgement, fines and interest for failing to ensure that their clients received best execution on client trades. One adviser agreed to pay over $1 Million for not conducting a proper best execution analysis after re-negotiating with its clearing broker so that the respondent received a greater share of the commission split. The other respondent, which agreed to pay nearly $500,000, did not use third party broker-dealers even though its ADV asserted that the firm did review other brokerage options. Both firms agreed to retain an independent consultant. As part of the settlement, one of the firms, whose CEO/CCO was also charged, agreed to employ for at least 5 years a Chief Compliance Officer “whose sole responsibility will be serving in that position.” Both firms were charged with violating Sections 206(2) and 206(4) (anti-fraud) and Rule 206(4)-7 (compliance rule).
OUR TAKE: The SEC appears to be renewing its efforts to review best execution and soft dollars, areas of historical concern that have not received much attention during the last couple of years. Although these actions indicate that firms should conduct a best execution review and that relying on the report of the clearing firm is insufficient, they don’t offer specific guidance on what will suffice. We suggest that firms consider a policy limiting affiliated brokerage to a certain percentage of client trades.