Regulators Eye Principles-Based ‘Best Ex’


US market regulators want to provide Wall Street with more specific guidance regarding best execution requirements and are mulling principles-based regulation.

“The fact that you are having a conference on best execution means that we should be doing more,” said Securities and Exchange Commissioner Elad Roisman, during the Best Execution, Trading, and Research Summit hosted by the Investment Advisor Association in Midtown Manhattan.

Although the Commission and the Financial Industry Regulatory Authority have worked to provide guidance on what best execution means, there are not that many cases that address the issue, he added.

Commissioner Roisman also noted that taking a principles-based approach to defining best execution requirements would make things easier for the industry even though it would be difficult to draft. “I acknowledge that but I think that it is overdue,” he said.

“If you try to change the rule and be prescriptive, it would be stale so quickly as the market evolved,” agreed Stephanie Dumont, senior vice president and director of capital markets policies at FINRA and who spoke on an earlier panel.

The industry can turn to the risk alerts like the one issued by the SEC’s Office of Compliance Inspections and Examinations on July 11, 2018, in which the regulator cited the six most frequent best execution issues during advisers exams.

FINRA also published a similar alert in 2015 on firm’s best execution requirements related to equities and fixed income trades, according to Dumont.

She also said it was encouraging to find trading, technology, sales, and compliance representatives at the conference sharing their perspectives on best execution since FINRA’s rule regarding best execution have had only a handful of changes since their adoption in 1968.

In the meantime, the SEC has upgraded the tools that it uses to examine whether clients have received best executions during the Investment Advisors and Investment Companies exams.

“We actually can compare the executions that the clients received using a new tool in the exam program,” said Mark Dowdell, assistant regional director, co-chair marketing & sales practices working group at the SEC’s Philadelphia regional office and who spoke on the same panel as FINRA’s Dumont. “We can actually analyze a trade blotter, compare executions that clients receive to other clients and so forth.”

He noted that best execution questions could come up during trade allocations.

“Some firms like to block trade during the day and allocate the trades in the evening,” said Dowdell. “Somehow it is strange that some of those allocations that have the best prices always tend to go to the largest or most favored clients.”

Dowdell ended his portion of the discussion recommending that firm develop a best execution policy; segregate the responsibilities of trading, trading, technology, sales, and compliance; and follow the program that the firm produces.

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