Advisory firms need to prepare for the financial communitys coming switch from the London Interbank Offered Rate (LIBOR) as the most commonly used interest rate benchmarks. Those who think of the benchmark situation as a problem affecting primarily banks are likely to be in for a rude shock, as many portfolios and financial contracts may be affected by it.
Wouldnt it be great to know what examiners expect to find - and, as a result, will be looking for - when they visit? In the area of best execution, at least, that is no longer a mystery. The SECs Office of Compliance Inspections and Examinations on July 11 released a risk alert containing "the most common deficiencies associated with advisers best execution obligations identified by OCIE staff."
Advisers have the responsibility of always seeking best execution for their clients. Doing so, however, is not as easy as it may initially sound - and advisers may find themselves in situations where they unexpectedly face issues that, in addition to being problems in and of themselves, create best execution problems. Advisers should be aware of when these may arise and how to handle them.
Private fund advisers specializing in real estate transactions need to beware. Steer clear of conflicts of interest when selling property from one client fund to another. Disclosure must be your watchword and favoritism cannot be shown to either fund, regardless of your firms percentage of ownership in each.
The SEC does not require that advisers achieve best execution when managing transactions for their clients. What it requires is that advisers seek best execution, which it sees as part of their fiduciary duty. That clarification in no way lessens the burden on advisers. If the agency finds an adviser is not seeking best execution, you can expect its enforcement foot to come down hard.
Best execution, best execution, best execution. Those two words are pounded into the minds of advisers and their trading desks so that clients receive the best deals possible. But they apparently made little difference to the SEC, which settled with a wrap fee program subadviser for failing to adequately disclose the frequency of trades it sent to non-affiliated brokers - even though the subadviser said those trades resulted in lower execution costs.
Examiners visiting advisory firms spend increasing amounts of their time these days on cybersecurity and other hot topics du jour. But thats by no means how they spend all their time. They also look into advisory firm bread-and-butter practices, not least among them relationships with non-affiliated broker-dealers.
Friendships between advisers and broker-dealers should only go so far. The majority owner of a broker-dealer learned this lesson the hard way last month after he allowed a financially troubled adviser who was also a longtime friend to set commission rates for his advisory clients, according to the SEC.
The new fiduciary rule unveiled by the Department of Labor on April 6 is not just for broker-dealers. Investment advisers and any other financial entities providing retirement investment recommendations are affected. As with most government regulations, more work is likely to be required.
The SEC this week adopted final crowdfunding rules that will allow small businesses to raise capital from investors - including possibly your clients - through web portals. Many of your clients will likely not be interested in making these investments, but smart advisers will be ready with at least some answers for those who are.