Investment Management: Fair Dealing: 

Best Execution

 

Best Execution

Position: It is the duty of investment managers to seek best execution for their clients, to ensure that any benefits accruing from the payment of commission fees beyond execution costs belong to the clients, and to inform their clients about how any benefits derived from those execution costs are invested.

Rationale: The role of the investment manager and the investment management firm is to achieve the best possible result for their clients. Trading on behalf of clients for the purpose of receiving benefits from the firm executing those trades, regardless of their effect on the clients’ portfolios, does not fulfill this role.

Where stated: Letter to FSA on Consultation Paper 176 20 October 2003; CFA Institute Soft Dollar Standards; Letter to FSA on Policy Statement 05/5 31 May 2005 (PDF)

 

Broker Selection

Position: It is the investment manager’s responsibility to select brokers that can best execute securities transactions in a manner that adds value to its client’s portfolio.

Rationale: Participating in arrangements that focus on factors other than the ability to achieve best execution ultimately violates the manager’s basic fiduciary duties to act in the client’s best interests. Investment managers’ selection of broker-dealers to execute trades should focus solely on the ability of that broker-dealer to achieve best execution.

Where stated: Letter to SEC on Use of Brokerage Commissions to Finance Distribution 9 August 2004

 

Execution Arrangements

Position: Investment managers should have to clearly disclose information about their best-execution policies and procedures in their disclosures about execution arrangements.

Rationale: Such disclosures would let investors know what the firm’s best execution policies are and how they may compare with other firms'.

Where stated: Letter to FSA on Consultation Paper 154 3 June 2003

 

Execution Venue Policies

Position: Investment firms should disclose to clients and potential clients the policies used to select execution venues and brokers; any changes made to those policies; any conflicts of interest the firms may have with respect to these venues and brokers; and actual order flow for prior periods by venue and broker.

Rationale: These disclosures will allow investors to determine whether their investment manager has a conflict of interest in dealing with an execution venue.

Where stated: Letter to FSA on Consultation Paper 154 3 June 2003

 

Analysis of Execution Benefits

Position: Investment managers should have to disclose to clients an analysis of the benefits or costs of their execution and commission arrangements.

Rationale: Such disclosures would help investors determine whether their investment managers’ trade execution policies provide benefits or costs to them. Such analyses would include:

a) a description of trading activity performed on behalf of that client’s portfolio and the costs associated with those trades, including an itemization of the components of those costs; and

b) an analysis of the costs and benefits of the arrangement agreed upon between the client and the investment manager.

Where stated: Letter to FSA on Consultation Paper 176 20 October 2003

 

Delegation of Best Execution Requirements

Position: Investment managers can delegate responsibility for best execution only if it clearly and explicitly requires in writing that the third-party service provider is responsible for obtaining best execution.

Rationale: Without explicit legal agreements, third-party service providers may not recognize that they have an obligation to obtain the best possible result for their client’s client.

Where stated: Letter to FSA on Consultation Paper 154 3 June 2003