The US Securities and Exchange Commission (SEC) has sanctioned two investment advisory firms for failing to seek best execution on client trades placed with their in-house brokerage divisions.
An SEC investigation found that New York-based A.R. Schmeidler & Co. (ARS), which is dually registered as an investment adviser and a broker-dealer, failed to re-evaluate whether it was providing best execution for its advisory clients when it negotiated more favourable terms with its clearing firm.
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This resulted in ARS retaining a greater share of the commissions it received from clients. The firm failed to implement policies and procedures reasonably designed to prevent its best execution violations.
ARS agreed to pay more than $1 million to settle the charges.
A separate SEC investigation found that Gregory W. Goelzer and his Indianapolis-based dually registered firm Goelzer Investment Management (GIM) made misrepresentations in its Form ADV about the process of selecting itself as broker for advisory clients.
The firm has failed to seek best execution for its clients by neglecting to conduct the comparative analysis of brokerage options described in its Form ADV, and recommended itself as broker for its advisory clients without evaluating other introducing-broker options as the firm represented it would.
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By GlobalDataGoelzer and GIM have agreed to pay nearly US$500,000 to settle the charges.
Andrew Ceresney, co-director of the SEC’s division of enforcement, said: "These cases send a clear message to dually registered investment advisers and broker-dealers about our expectations in connection with their best execution analysis."
"Investment advisers must carefully analyze whether their clients are obtaining the most beneficial terms reasonably available for their orders, particularly if those orders are executed through affiliated broker-dealers, "Ceresney added.
Marshall Sprung, co-chief of the SEC enforcement division’s asset management unit, said: "There is a clear conflict of interest when investment advisers execute client trades through their broker-dealer arm. The unit is focused on pursuing dually registered firms that fail to address this conflict through robust disclosure, best execution analysis, and compliance procedures."
ARS agreed to pay disgorgement of US$757,876.88, prejudgment interest of US$78,688.57, and a penalty of US$175,000. The firm also must engage an independent compliance consultant.
GIM agreed to pay disgorgement of US$309,994, prejudgment interest of US$53,799, and a penalty of US$100,000. Goelzer agreed to pay a US$35,000 penalty.
