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Digital Subscriptions > The Hedge Fund Journal > Issue 134 – Aug 2018 > OCIE Best Execution Risk Alert

OCIE Best Execution Risk Alert


Guidance and lessons for private fund managers


On July 11, 2018, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (“OCIE”) issued a Risk Alert1 focusing on the most common deficiencies relating to best execution found by the SEC staff (“staff”) in recent examinations of investment advisers. The Risk Alert provides a snapshot of OCIE’s expectations regarding a fund manager’s best execution policies and procedures.

The obligation of best execution

An investment adviser’s obligation to seek best execution for client securities transactions is based in an investment adviser’s fiduciary duties. The SEC and its staff have long indicated that an investment adviser must satisfy fiduciary standards of care in selecting brokers for clients, negotiating commissions and compensation terms for clients’ securities transactions, and supervising execution quality.

While the staff’s position that there is a duty of best execution is unambiguous, the factors that an investment adviser may use in evaluating whether its clients are receiving best execution and the relative weights given to the various factors are not fixed or enumerated. In selecting broker-dealers for client accounts and in agreeing to the economic terms of the resulting trading activities, an adviser may take into consideration numerous quantitative and qualitative factors in seeking best execution, including the commission rates, the quality of execution, the research provided to the adviser, the broker-dealer’s financial responsibility and responsiveness to the adviser.2

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