Best Execution Guidelines for Fixed-Income Securities
SIFMA’s Asset Management Group (SIFMA AMG) published best execution guidelines for fixed-income securities.
Excerpt
Background
It has long been acknowledged that an asset management firm is a fiduciary subject to a number of duties when acting on behalf of its clients. Among the most important of these duties is the requirement that an asset manager seek “best execution.” Best execution is not formally defined in the U.S. federal securities laws and securities industry participants are not uniform in their definition of the term. Industry participants and regulators seem to agree that best execution contemplates an asset manager’s executing securities transactions on behalf of a client with the goal of maximizing value for the client under the particular circumstances occurring at the time of a transaction, and generally acknowledge that best execution is not easily quantifiable and encompasses many factors.
Much of the existing guidance regarding an asset manager’s duty to seek best execution has been developed in the context of equity securities and the equity markets. Significant differences exist, however, between the equity and fixed-income markets. A far greater number and far more types of instruments, for example, trade on fixedincome markets than on equity markets. The fixed income markets are characterized by bilateral transactions between parties as principals as opposed to equity markets in which transactions are undertaken on centralized exchanges facilitated by agents. Unlike their equity counterparts, fixed-income markets are fragmented and often subject to limited transparency as a result of the absence of a centralized reporting mechanism for completed transactions.
It is clear that the duty to seek best execution imposed on an asset manager is the same regardless of whether the manager is undertaking equity or fixed-income transactions. The characteristics of the fixed-income markets present a manager with practical difficulties, though, in assessing and documenting fixed-income best execution not faced when undertaking equity transactions. These difficulties in turn result in significant challenges to an asset management firm when developing, and regulators when evaluating, policies and procedures designed to ensure compliance with the duty of best execution of fixed-income security transactions. The lack of existing practical guidance regarding that duty exacerbates the challenges.