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March 1, 2002

SEC Implored on Best Execution: Advisory Firm Group Disagrees With Investment Managers

By Gregory Bresiger

A trade group representing advisory firms is warning that proposed best execution trading guidelines could be confusing.

The Investment Counsel Association of America (ICAA) in Washington contends that best execution guidelines offered by another group, the Association for Investment Management and Research (AIMR), overemphasize the importance of quantitative measurement concepts.

"[The ICAA] strongly believes that best execution cannot be precisely ascertained nor can it be precisely measured, either on a trade by trade basis or aggregate basis," writes ICAA executive director David Tittsworth, in a letter to the Securities and Exchange Commission.

Business Reality

Tittsworth writes that guidelines adopted by the regulators should, "not underscore quantitative measurement concepts that are inconsistent with the SEC's definition of best execution and with business reality." He noted that the SEC has been trying to clarify best execution since it issued a release in the 1980s.

Arthur Levitt, the previous chairman of the SEC, had pushed for clearer best execution standards. SEC officials have been working on a report on best execution, which has been much awaited.

"Best execution is not just the lowest costs," according Tittsworth. "I'm not even sure that the SEC can even quantify exactly what it is," he added. This kind of standard is really a moving target. It changes, he said, from, "transaction to transaction and from firm to firm."

ICAA officials contend that part of the problem over establishing clear best execution rules stems from the confusion over best execution standards for a broker dealer, which may not be the same as an investment adviser.

Tittsworth also contended that the best execution standards are not only different between brokers and advisers, but also within each of those communities. He added that soft- dollar rulekeeping regulations under consideration may be inconsistent with previous regulations.

A firm that generates many soft-dollar credits each year, for example, would be required to identify the products and services purchased with soft-dollar credits each year, ICAA officials noted. For a large firm, they added, "complying with that provision is impractical and does not provide any practical benefit."