SEC Brings Rule 206(4)-7 Case Against Dually Registered Adviser/Broker-Dealer for Inadequate Best Execution Procedures

July 28, 2014

The SEC brought an administrative action against  Dominick & Dominick LLC and Robert Reilly, its Chief Operating Officer, for failing to adopt and implement written best execution policies and procedures reasonably designed to ensure compliance with the Advisers Act. The SEC found that Dominick & Dominick’s written advisory best execution policies and procedures made little mention of any actual policies or procedures. They referred only to fixed income transactions and made no mention of any other securities transactions. Moreover, the policies and procedures did not consider commissions charged to advisory clients as part of its overall best execution analysis.

Dominick & Dominick is an investment adviser and broker-dealer with a principal place of business in New York, New York. It had approximately 30 advisory personnel who had clients in one or more of Dominick & Dominick’s five types of advisory programs. Dominick & Dominick also provides brokerage services to nearly all of its advisory clients.  Reilly is the Chief  Operating Officer and a registered investment advisory representative of Dominick & Dominick. Reilly was responsible for conducting Dominick & Dominick’s best execution analyses for advisory clients.

As part of its advisory program, Dominick & Dominick provided participating clients with a best execution analysis that compared the price in a client portfolio transaction obtained by its clearing broker to the Bloomberg price for that security at the same date and time. The SEC found the analysis to be inadequate because it only looked at execution price and failed to consider the commissions that certain of the advisory clients paid.

The SEC also stated that Dominick & Dominick did not conduct any best execution analysis in August 2010 when it negotiated an amendment to its clearing agreement with its clearing broker. While the agreement reduced the clearance and execution costs charged by Dominick & Dominick’s clearing broker, it increased Dominick & Dominick’s share of the commissions charged to all of its customers (including certain of its advisory clients) without altering the allocation of responsibilities between Dominick & Dominick as an introducing broker and its clearing broker. Notwithstanding this reduction in executing and clearing costs, the SEC stated that Dominick & Dominick did not consider whether certain of its advisory clients continued to receive best execution.

The SEC also found a number of related disclosure violations. From January 2008 to September 2012, Dominick & Dominick did not disclose in its Form ADV a conflict involving its clearing firm that it received a rebate from its clearing firm of a certain portion of the interest that certain advisory clients paid the clearing firm for margin loans. Under its agreement with its clearing firm, the clearing firm rebated to Dominick & Dominick a percentage of the difference between the average customer margin rate and the federal funds rate.

The SEC noted that Dominick & Dominick stated in its Form ADV that “[w]e have negotiated commission rates with D&D for our clients which we believe to be competitive with rates available elsewhere for similar services.” According to the SEC, this statement suggests that Dominick & Dominick’s commission rates resulted from arms-length negotiation between Dominick & Dominick in its investment adviser capacity and Dominick & Dominick in its broker capacity when they did not.

Dominick & Dominick also stated in its Form ADV that it “will not act as principal in any transaction for your accounts or act as agent on both sides of any transaction, unless you have granted us permission to do so prior to the completion of the transaction.” According to the SEC, this statement indicates that Dominick & Dominick would seek client consent before settling principal transactions with advisory clients when it did not do so.

Additionally, the SEC found that from January 2008 through December 2012, Dominick & Dominick did not adopt and implement written best execution policies and procedures reasonably designed to ensure compliance with the Advisers Act. The SEC stated that Dominick & Dominick’s written advisory best execution policies and procedures made little mention of any actual policies or procedures. They referred only to fixed income transactions and made no mention of any other securities transactions. Moreover, the SEC found that Dominick & Dominick’s policies and procedures did not consider commissions charged to advisory clients as part of its overall best execution analysis.

Lastly, the SEC found that from January 2008 through August 2012, Dominick & Dominick engaged in approximately 140 principal transactions with advisory clients without obtaining consent prior to completing such transactions. Dominick & Dominick’s practice was to send a letter to the advisory client after a transaction was executed but before settlement, providing details of the transaction and stating that it had engaged in the transaction as a principal. According to the SEC, the letter did not seek the client’s consent to proceed with or settle the transaction, and it did not otherwise obtain the client’s consent. It simply gave notice of the transaction and required no further action from the client.

Please click here to access the administrative action.


Categories

Investment Advisers