The SEC censured and fined an institutional manager for charging different commission rates to different clients even though the manager combined orders in block trades. The compliance policies and procedures required that the manager allocate execution costs on a pro rata basis when using block trading. However, certain client agreements (or instructions) imposed a cap on commission rates. The SEC alleges that the manager allocated commission rates up to the cap for the preferred clients and then allocated the remaining costs to the other clients, thereby causing them to incur more than their pro rata share. The SEC charges the manager with failing to follow its own procedures.
Large institutional clients often request special treatment either directly or through “most favored nation” clauses. Sales folks want to land these relationships and often agree to client requirements without consulting with the compliance team. As a result, last year’s clients loses out to this year’s prospect. A fiduciary should treat all its clients equitably.