On July 31, 2013, the SEC announced settlements of two separate enforcement actions in which the SEC alleged that the defendants violated their duties to seek best execution.
In the case against A.R. Schmeidler & Co., Inc. (“ARS”), a dually registered broker-dealer and investment adviser, the SEC alleged that ARS selected itself as the broker-dealer to execute trades for its clients, unless the client specifically instructed it not to do so. According to the settlement order, ARS contracted with a third-party clearing firm to provide certain execution, clearance and custody services. ARS thereafter amended its contract with the clearing firm to increase the amount that ARS would be paid in connection with the commissions charged for client trades. The SEC alleged that ARS failed to conduct sufficient analysis in approving this amended arrangement to determine whether ARS properly sought best execution for its clients. The SEC also asserted that ARS failed to implement its own policies and procedures regarding best execution.
In the other case, the SEC alleged that Goelzer Investment Management, Inc. (“GIM”), a dually registered broker-dealer and investment adviser, and Gregory W. Goelzer, GIM’s Chief Compliance Officer, failed to comply with various statements in GIM’s Form ADV regarding best execution. According to the SEC, GIM’s standard practice was to act as a broker-dealer to execute trades for nearly all of its advisory clients, except when a client directed GIM to use a different broker-dealer. GIM’s Form ADV Part 2 stated that GIM’s recommendation that clients use GIM as their broker was based on GIM’s consideration of several factors, including: the products offered; the level of service; the quality of trade execution; the record keeping and reporting capabilities; the trading platforms offered; and the ability to meet client needs. The SEC alleged that, in fact, GIM failed to evaluate brokerage options for its clients in this manner and never compared its commission rates to its competitors.
The SEC also alleged that GIM violated the Advisers Act because it failed to disclose the negotiability of its advisory fees in its Form ADV, Per Item 1.D of Form ADV Part 2. This omission was misleading because approximately 75% of GIM’s clients paid less than the amounts set forth in the standard schedule GIM disclosed in its Form ADV Part 2.
In agreeing to the terms of the settlements, neither firm admitted or denied the SEC’s findings, but agreed, among other sanctions, to pay disgorgement and civil monetary penalties. The ARS order is available here, and the GIM order is available here.