With New Risk Alert, SEC Doubles Down on Best Execution
On July 11, 2018, the SEC issued a Risk Alert outlining commonly found compliance issues related to best execution by investment advisers.
Advisers have an obligation to seek best execution of client transactions, taking into consideration quantitative factors such as execution quality and commission rate, as well as more qualitative factors such as the value of research provided and responsiveness to the adviser. There is no single determinative factor in broker selection; rather, an adviser should seek to obtain in all transactions the best execution for the client account.
Advisers must systematically and periodically review execution quality and maintain documentation to that effect.
The most common compliance issues related to best execution include:
- Failure to perform best execution reviews – Advisers either did not periodically and systematically evaluate best execution or they failed to maintain documentation to evidence such evaluation
- Failure to consider materially relevant factors during best execution reviews – Advisers did not consider the full range and quality of a broker-dealer’s services (e.g. not incorporating qualitative factors or not seeking input from the trading desk)
- Failure to seek comparisons from other broker-dealers – Advisers utilized certain broker-dealers without seeking out or considering the quality and costs of services available from other broker-dealers
- Failure to fully disclose best execution practices – Advisers did not provide full disclosure of best execution practices (e.g. not disclosing 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)
- Failure to disclose soft dollar arrangements – Under Section 28(e) of the Securities Exchange Act of 1934 (the “Exchange Act”), an adviser may pay more than the lowest commission rate in soft dollar arrangements without breaching its fiduciary obligation, provided that certain specified conditions are met. Some advisers failed to provide full and fair disclosure of soft dollar arrangements (e.g. certain clients may bear more of the cost of soft dollar arrangements than other clients or arrangements where products and services were acquired that did not qualify as eligible brokerage and research services under Section 28(e))
- Failure to properly administer mixed use allocations – Advisers 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 support, through documentation or otherwise, of the rationale for mixed use allocations
- Failure to implement or follow best execution policies and procedures – Advisers appeared to have inadequate compliance policies and procedures or internal controls regarding best execution or failed to follow policies and procedures (e.g. commitments to monitor and review best execution on an ongoing basis)
About TradeSentry™
CSS TradeSentry is a post-trade compliance and trade surveillance solution covering everything from best execution review to insider trading detection. TradeSentry can enable your compliance team to:
- Monitor execution performance by account, broker, or trading venue using transaction cost analysis
- Analyze trading volumes, commissions, and fees for executing brokers
- Compare soft-dollar broker performance to hard-dollar broker performance
- Benchmark execution quality with access to industry-leading reference data from Markit TCA™ for equity, fixed-income and foreign exchange
- Collaborate with traders and portfolio managers directly in the tool – no more fragmented email chains
- Create best execution compliance reports for Rule 206(4)-7 annual testing
TradeSentry is secure, cloud-based and backed by years of experience in the field.
Tackle your trading compliance challenge systematically with TradeSentry by scheduling a demo today.
About CSS Services
The experienced consultants of Ascendant Compliance Management – a CSS Company – can review your firm’s best execution policies and procedures as part of an annual review engagement, assisting you in identifying any gaps or material risks.
For more information, contact us or call (860) 435–2255.
Post written by Brian DeDonato & Kelley Merwin
California Privacy Law Brings ‘GDPR-Lite’ to the U.S.
In what has become an ongoing race among states to have the toughest privacy regulation in the U.S., California has jumped to the front. On June 28, 2018, California’s legislature unanimously passed a privacy bill that was later signed by Governor Jerry Brown, which simultaneously strengthens privacy protections for California residents while possibly mooting an even stronger privacy bill opposed by major technology companies that was slated to be on the November ballot.
The California Consumer Privacy Act of 2018 (AB-375) mirrors some of the consumer privacy rights for EU residents that took effect in May 2018 as part of the General Data Protection Regulation (GDPR), but with significantly lower penalties than the GDPR. Under AB-375, penalties for a violation are up to $750 per person up to a maximum of $7,500 per violation.
Consumers will have the right to transparency by asking a company for a list of the “categories and specific pieces of personal information” that the company has collected about them, the categories of sources for the data, and the categories of third parties to whom it has sold the data. Consumers will also have the right to request that their personal information be deleted by the company. The bill imposes a specific opt-in to consent to the sale of data belonging to a consumer under age 16.
The Act is effective January 1, 2020, and although it is geared towards Californians, it is likely to have far-reaching consequences across various industries and in other states. It is unlikely that companies with a regional or national presence will develop processes and systems for responding to such consumer requests without rolling out such changes across the board. And because the law applies to the data of California residents, any business who does more than just a one-time transaction with a California resident will have to take notice of this new privacy regulation and prepare accordingly.
CSS CRO Jeanette Turner on Bloomberg Markets
CSS’ global profile continues to rise. Chief Regulatory Officer Jeanette Turner recently appeared on Bloomberg Markets: Rules & Returns to discuss changing approaches to compliance, data management and reporting requirements, with an emphasis on two CSS strengths: technology and automation.
“For reporting, which is the new thing that regulators are focused on – they love getting data – it’s about data,” she said. “Data is the new books and records.”
You can watch Jeanette’s interview by clicking here, starting at the 10:30 mark.
SEC Deficiency Letters Require Swift Action
On the topic of SEC Deficiency Letters, if you have received one, you must promptly take corrective action. The SEC will not tolerate inappropriate delay. The SEC recently imposed an $8 million civil penalty on an adviser who, among other things, failed to promptly take corrective action in its Form ADV filing, following receipt of a Deficiency Letter that described omissions and misstatements in Form ADV Part 2A and Part 2B.
If you have not let Ascendant Compliance Management – a CSS Company – help you develop your Compliance Program and prepare for your SEC Exam, it is not too late. Let us assist you in responding to the SEC’s Deficiency Letter. Our staff can assist you on an expedited basis, and help you avoid an Enforcement Action. For more information, send us an email or call at 860-435-2255.
Past Conference Speaker Inspiration for The Rock’s Next Blockbuster
If you attended Ascendant’s 2016 San Diego conference, you will no doubt remember our outstanding keynote speaker, Jeff Glasbrenner.
Jeff is a below-the-knee amputee who was fresh off becoming the first American amputee ever to scale Mount Everest. In San Diego, he spoke about turning challenges into triumphs, and about succeeding in the face of adversity. His message wasn’t just an inspiration to those of us in San Diego. It also caught the eye of the biggest box-office star on the planet, The Rock, who said Glasbrenner is the inspiration for his character in his upcoming summer blockbuster, Skyscraper. In it, The Rock plays Will Sawyer, an amputee who must save his family against impossible odds.
Check out The Rock and Glas below, and register for Ascendant’s next San Diego conference here. You never know who you’re going to meet.
Relief at Last – New Guidance on Inadvertent Custody
The SEC quietly provided additional guidance to the industry about inadvertent custody in supplemental responses to the Custody Rule FAQs. In Question II.11 and II.12, the SEC stated that it would not recommend enforcement against an adviser that does not have a copy of a client’s custodial agreement, and does not know or have reason to know whether the client’s custody agreement would give the adviser inadvertent custody. Note that this relief does not apply if the adviser had recommended, requested or required a client’s custodian.
This interpretive guidance clarifies the ambiguity created by previous guidance and provides advisers with much needed relief from the onerous task of determining whether they have inadvertent custody. Hopefully, the SEC will next address the “delivery vs. payment” questions surrounding the authorized trading exemption from the Custody Rule.
Ascendant’s Custody Toolkit will help you understand and document compliance with the key elements of the Custody Rule; identify accounts over which your firm has custody; identify available exceptions to certain requirements of the Rule based on industry guidance; manage a list of accounts to provide to an accountant for a surprise examination; and evidence your analysis for determining the information in Item 9 of your Form ADV Annual Updating Amendment. To learn more, click here.