Best execution for investment advisers: the goal and the process.(fiduciary duties, Investment Advisers Act of 1940, Investment Company Act of 1940, Employee Retirement Income Security Act of 1974)

What exactly is the best execution duty of investment advisers? There is no clear consistent definition relied upon by regulators and courts and it has assumed different forms in different cases with different facts. Nevertheless everyone understands that it is an integral part of the fiduciary duty of an investment adviser. This article endeavors to answer the question with an emphasis on the dynamic process by which an adviser can achieve best execution and monitor its compliance on an ongoing basis, responding to changes in regulation, markets, and its own operations. The discussion of statutory standards in this article refers to the fiduciary standards imposed on investment advisers pursuant to the Investment Advisers Act of 1940, as interpreted by the Securities and Exchange Commission, and does not address the additional requirements that may be imposed by other federal statutes on advisers providing services to certain types of clients such as the Investment Company Act of 1940 and the Employee Retirement Income Security Act of 1974 (ERISA).

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What exactly is the best execution duty of investment advisers? There is no clear consistent definition relied upon by regulators and courts and it has assumed different forms in different cases with different facts. Nevertheless everyone understands that it is an integral part of the fiduciary duty of an investment adviser. This article will endeavor to answer the question with an emphasis on the dynamic process by which an adviser can achieve best execution and monitor its compliance on an ongoing basis responding to changes in regulation, markets, and its own operations. The discussion of statutory standards in this article will refer to the fiduciary standards imposed on investment advisers pursuant to the Investment Advisers Act of 1940, as amended (the "Advisers Act"), as interpreted by the Securities and Exchange Commission (the "SEC") and will not address the additional requirements that may be imposed by other federal statutes on advisers providing services to certain types of clients such as the Investment Company Act of 1940, as amended, and Employee Retirement Income Security Act of 1974, as amended.

THE CHALLENGE: DEFINITION

Best execution is a concept applied to many fact patterns. It has assumed many forms. Each of the following definitions allows flexibility to cover a wide range of trading circumstances, yet maintains a focus on the fiduciary duty: The duty to seek best execution is the duty:

 
   [T]o execute securities transactions for clients 
   in such a manner that the client's total cost 
   or proceeds in each transaction is the most 
   favorable under the circumstances. (1) 
 
   Investment advisers, like broker-dealers, owe 
   a duty to their clients to seek to obtain best 
   execution and must obtain the most favorable 
   terms reasonably available when executing 
   securities transactions. (2) 
 
   As a fiduciary, a money manager has an obligation 
   to obtain "best execution" of clients' 
   transactions under the circumstances of the 
   particular transaction. The money manager 
   must execute securities transactions for clients 
   in such a manner that the client's total cost or 
   proceeds in each transaction is the most favorable 
   under the circumstances [footnote 
   omitted]. A money manager should consider 
   the full range and quality of a broker's services 
   in placing brokerage including, among other 
   things, the value of research provided as well 
   as execution capability, commission rate, financial 
   responsibility, and …