Global Securities Markets: Navigating the World's Exchanges and OTC Markets

CURRENT SMA EXAM ISSUES

As registered investment advisers, both sponsors and money managers are subject to regular examinations by securities regulators. In recent years, the SEC has focused on the following issues in its examination of SMA programs:

• Best execution
• Suitability
• Fee calculations
• Disclosures
• Rule 3a-4 compliance16

The issue of best execution has become a significant focus of regulators. Investment advisers are required to act in the best interest of their advisory clients. Part of that obligation includes obtaining the best price and execution for their securities transactions. The SEC defines “best execution” as “seeking the best price for a security in the marketplace as well as ensuring that, in executing client transactions clients do not incur unnecessary brokerage costs and charges. To seek to obtain best execution, advisers must periodically evaluate the execution performance of the broker-dealers they use to execute client transactions.”17 Two of the most common deficiencies found by the SEC in the area of best execution are (1) inadequate internal controls related to brokerage arrangement and execution, and (2) failure to disclose conflicts of interests related to brokerage arrangements.

Both sponsors of SMA programs and money managers in SMA programs have an obligation to determine whether the SMA is suitable for the investor client; this suitability obligation stems from the Advisers Act.

Rule 3a-4 does not specifically define suitability, but it is commonly ...