Funding advisers are fiduciaries that owe an obligation of care and loyalty to their purchasers. One part of this responsibility of care is an obligation to hunt greatest execution of shopper securities transactions. Whereas this requirement may sound comparatively simple, the dearth of a single definition for what this responsibility truly requires could make it difficult for advisers searching for to know exactly what it means to adjust to this accountability.
Among the best sources of steering from the Securities and Trade Fee (SEC) is a 1986 interpretive launch that unofficially units forth a framework for satisfying the fiduciary responsibility to hunt greatest execution of securities transactions in shopper accounts. Broadly, the assertion says that an adviser ought to think about the totality of providers that it brings to the desk, together with each quantitative and qualitative components corresponding to the worth of funding analysis the custodial broker-dealer supplies to the adviser, execution functionality (i.e., the sorts of funding merchandise or methods {that a} custodial broker-dealer can deal with in an correct and well timed style), and fee charges (which may embrace asset-based pricing, platform charges, account exercise charges, and extra), amongst others.
The SEC, in its interpretive launch, units an expectation of “periodic and systematic analysis” (i.e., preliminary and ongoing due diligence) of the custodial broker-dealer(s) which can be used for shopper securities transactions, indicating that advisers ought to carry out preliminary due diligence on any new custodial broker-dealer for use for shopper securities transactions, after which periodic ongoing due diligence of mentioned custodial broker-dealer thereafter (although the SEC doesn’t prescribe any specific frequency of such evaluations).
Notably, a lot of the language from the 1986 SEC Interpretive Launch was later reiterated in a 2018 SEC Threat Alert and a 2019 SEC Interpretation. These 2 communications urged that advisers have differing duties relying on whether or not they’re accountable for choosing broker-dealers and executing shopper trades, which means that advisers that haven’t accepted the accountability to pick out custodial broker-dealers on behalf of the shopper (e.g., as a result of the shopper voluntarily directs the adviser to execute trades on their behalf at a specific dealer of the shopper’s selecting), or didn’t suggest such a directed association, just isn’t below an obligation to hunt the most effective execution of shopper transactions (although the adviser should nonetheless disclose the doable draw back prospects of such an association, corresponding to much less favorable execution and/or larger prices).
Lastly, the SEC Division of Enforcement’s extension of greatest execution ideas to advisers’ mutual fund share class choice, as evidenced by the string of enforcement actions that resulted from the SEC’s iterative Share Class Initiative that originated in 2016, suggests that there’s a de facto greatest execution obligation for an adviser to pick out the bottom value share class a shopper is eligible for inside a mutual fund. Which could require advisers to periodically scrub the roster of mutual funds they buy for purchasers to substantiate that no lower-cost share class alternate options can be found and that purchasers with current mutual fund holdings should not eligible for a tax-free conversion to a lower-cost share class inside the identical mutual fund.
In the end, the important thing level is that by remaining aware of each the quantitative and qualitative components that the SEC expects to be thought-about when initially and periodically evaluating such custodial broker-dealers, advisers can guarantee they not solely fulfill their fiduciary responsibility to hunt the most effective execution on behalf of their purchasers but in addition proceed delivering the absolute best outcomes!
