SEC Sanctions Two Dually-Registered Investment Advisers for Failing to Obtain Best Execution for Clients

On July 31, 2013, the SEC announced that it had settled charges against two dually-registered firms (i.e., firms registered with the SEC as both investment advisers and broker-dealers) arising out of their failure to seek and obtain best execution on behalf of clients.  While not directly involving hedge fund managers, these two enforcement actions are nonetheless pertinent and instructive for hedge fund managers for at least two reasons.  First, the actions illustrate the ways in which the SEC is scrutinizing dual registrants to ensure that such firms are appropriately addressing, managing and mitigating conflicts of interest arising out of the simultaneous provision of brokerage and investment advisory services to clients.  See “SEC’s National Examination Program Publishes Official List of Priorities for 2013 Examinations of Hedge Fund Managers and Other Regulated Entities,” Hedge Fund Law Report, Vol. 6, No. 9 (Feb. 28, 2013) (identifying dual registration as an emerging issue).  Second, these actions suggest a refocusing by the SEC’s enforcement staff on best execution generally, despite a dearth of recent enforcement activity in this area.  This article summarizes the factual and legal allegations in each case, as well as the sanctions levied against the defendants.  In doing so, this article provides insight into the types of acts and omissions that raise concerns for the SEC on the topics of dual registration and best execution – thereby enabling hedge fund managers to structure and operate in a way that avoids such problematic conduct.  See also “Trading Practices Session at SEC’s Compliance Outreach Program National Seminar Addresses Need for Holistic Compliance Procedures Dealing with Allocations, Best Execution and Cross Trades,” Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012).

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