Brokers and asset managers have a fiduciary duty of best execution. You can think of it as an obligation to act in the best interests of your clients when buying and selling securities. In most cases, this means striving to offer the best prices to your customers.
While these centuries-old fiduciary duties stem from common law, the broker’s duty of best execution is codified by the rules of the Financial Industry Regulatory Authority and the Municipal Board of Securities.
Now, however, the GameStop phenomenon in 2021 and heightened concerns about exchanges and wholesalers paying brokers for order flow have prompted the SEC leadership to adopt its own best execution rule.
SEC Chairman Gary Gensler has made it clear that the new SEC rule will allow the regulator to set and enforce higher standards. In theory, we agree.
Unfortunately, while the SEC’s 439-page best execution proposal may perhaps better protect some individuals trading through online brokerages, it does nothing to improve best execution for investment advisors. Worse, it would remove liabilities from brokers and the protections of pension funds and institutional investors.
Despite statements by the SEC chairman that the SEC should have its own best execution rule, nothing in the SEC proposal requires investment advisors to even have a best execution policy or conduct any analysis, let alone any specific details.
Of course, many “best practices” have emerged over time, including doing a “transaction cost analysis” of deals, tracking (separately) “research” payments and “deal execution” payments, and other steps. But these steps—which can be great—are not required universally and can vary greatly from consultant to consultant.
While the SEC research team has identified many weaknesses in investment advisors’ best execution policies, procedures, and practices, the SEC still refuses to even offer a rule or guidance, let alone any meaningful enforcement of its vague interpretation that advisors fulfill their fiduciary obligations. duty. In fact, when the SEC updated its interpretation of the fiduciary duties of investment advisers in 2019, it devoted just one page (double-spaced, with long footnotes) to the topic.
However, instead of filling this void, the SEC chose to expose investment advisors and other institutional investors to greater risk by relieving the broker-dealer of having to meet its own best performance obligations if “the institutional client, in its independent judgment, honors its obligations.” his order against the broker-dealer’s quote.”
An entirely new exception is proposed that weakens rather than enhances best execution.
There have been several exceptions to the best execution rule over the years, such as when brokers receive unsolicited instructions from their clients to route to certain destinations without intervention, and the broker follows the instructions.
It’s something else. While the Commission may think the new exemption is good for investors, it opens a Pandora’s box for abuse. The exception, which would apply to trades in equities, fixed income, options and other derivatives, would allow brokers to effectively ignore “best execution” for a potentially large number of their trades with institutional clients. There is no requirement that quotes be close to prevailing market prices (displayed or not) or that quotes be publicly available or the same across clients.