United States: OCIE Warns Advisers Regarding Best Execution Obligations

On July 11, 2018, the Securities and Exchange Commission (SEC) issued a risk alert outlining certain compliance issues identified by its Office of Compliance Inspections and Examinations (OCIE) related to the obligation to seek best execution under the Investment Advisers Act of 1940 (the Act).

Registered advisers should review their policies and practices in light of OCIE's alert in order to ensure their compliance programs meet their obligations in this regard — and make any necessary improvements.

Under the Act, advisers' fiduciary obligations require that when they select broker-dealers and execute client trades, they seek the "best execution" of client transactions, including by ensuring that the client's total costs or proceeds are the most favorable under the circumstances in each transaction. Specifically, the SEC reiterated that "the determinative factor [in an adviser's best execution analysis] is not the lowest possible commission cost but whether the transaction represents the best qualitative execution for the managed account." To that end, the SEC recommended that advisers "periodically and systematically evaluate the execution quality of broker-dealers executing their clients' transactions."

In this regard, OCIE indicated that an adviser's receipt of soft dollars such as brokerage and research services as part of so-called soft dollar arrangements may affect an adviser's best execution assessment. While advisers' fiduciary duty does not require them to pay the lowest-available rate for such services, OCIE stated that "an adviser should make a reasonable allocation of the costs of the product or service according to its use and keep adequate books and records concerning such allocation. Advisers must disclose soft dollar arrangements and must provide more detailed disclosure when the products or services they receive do not qualify for Section 28(e)'s safe harbor."

The risk alert further elaborated on several of the most common deficiencies OCIE staff discovered during examinations of advisers' best execution obligations. These included:

  • Not performing best execution reviews — Certain advisers could not demonstrate they conducted periodic and systematic evaluations of the execution performance of the broker-dealers they used in connection with the execution of client transactions. In fact, OCIE staff noted that some advisers did not conduct a best execution evaluation when selecting a broker-dealer, while others were unable to demonstrate, through documentation or otherwise, that they performed such an evaluation.
  • Not considering material factors during reviews — Staff observed that some advisers did not consider the full range and quality of a broker-dealer's services. In this regard, the OCIE staff indicated that some advisers failed to evaluate any qualitative factors associated with the broker-dealer (including, but not limited to, the broker-dealer's execution capability, financial responsibility and responsiveness to the adviser), and did not solicit or review input from the adviser's traders and portfolio managers during a review of a broker-dealer's services.
  • Not seeking comparisons from other broker-dealers — Some advisers did not seek out or consider the quality and costs of services available from other competing broker-dealers, either initially or on an ongoing basis. Other advisers utilized a single broker-dealer "based solely on cursory reviews of the broker-dealer's policies and prices" or relied solely on the broker-dealer's "brief summary of its services without seeking comparisons from other broker-dealers," making it impossible to determine whether they were meeting their best execution obligations.
  • Not fully disclosing best execution practices — OCIE staff observed that some advisers did not provide full disclosure of best execution practices, including failing to disclose information 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. Other advisers did not fulfill representations made in their brochures that they would review trades to ensure that prices fell within an acceptable range.
  • Not disclosing soft dollar arrangements — Certain advisers did not provide full and fair disclosure in Form ADV of their soft dollar arrangements, including their use of such arrangements or the potential cost for investors.
  • Not properly administering mixed use allocations — Staff observed deficiencies related to mixed use allocations, such as advisers that did not appear to make a reasonable allocation of the cost of a mixed use product or service according to its use, or did not produce supporting reasons for such mixed use allocations.
  • Inadequate best execution policies and procedures — Staff observed advisers that had inadequate compliance policies and procedures or internal controls regarding best execution. This included advisers that lacked any policy relating to best execution, and others that had insufficient internal controls due to their failure to monitor broker-dealer execution performance or had policies that did not consider the current business of the adviser, such as the type of securities traded.
  • Not following best execution policies and procedures — The OCIE staff also noted that some advisers were not following their own policies and procedures regarding best execution, including some that did not follow policies regarding best execution review, seeking comparisons from competing broker-dealers or allocating soft dollar expenses.

In response to OCIE's examinations, some advisers have modified their disclosures regarding best execution and/or soft dollar arrangements, revised their compliance policies and procedures, or otherwise updated their practices in these areas. OCIE encouraged advisers to review their own practices, policies and procedures in the outlined areas and make any required improvements in order to ensure their compliance programs meet their obligations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Cadwalader, Wickersham & Taft LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Cadwalader, Wickersham & Taft LLP
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions