[14161]
November 19, 2001
TO: SEC RULES COMMITTEE No. 91-01
INVESTMENT ADVISERS COMMITTEE No. 26-01
COMPLIANCE ADVISORY COMMITTEE No. 57-01
EQUITY MARKETS ADVISORY COMMITTEE No. 46-01
RE: PROPOSED AIMR TRADE MANAGEMENT GUIDELINES
The Association for Investment Management and Research (“AIMR”) has published for
comment the attached “Trade Management Guidelines.” The Guidelines are a compilation of
best practices that AIMR encourages investment management firms to adopt. In recognition of
differences among firms, AIMR recommends that each firm tailor the procedures in a manner
that fits its specific needs and circumstances. The Guidelines are divided into three areas:
processes, disclosures, and recordkeeping, each of which is discussed in more detail below.
Comments on the Guidelines are due to AIMR no later than February 12, 2002. If you have any
comments you would like the Institute to consider including in its comment letter, please
provide them to the undersigned by phone at 202-371-5408, by fax at 202-326-5839 or by e-
mail at aburstein@ici.org no later than December 10.
I. PROCESSES
A. Trade Management Policies and Procedures
The Guidelines recommend that a firm establish formal trade management policies and
procedures designed to maximize the value of client portfolios. In particular, based upon a
firm’s size, structure, and organizational complexity, AIMR recommends that a firm:
1. Establish a trade management oversight committee (“TMOC”). The TMOC,
which should meet formally on a regular basis, would have responsibility for
developing, evaluating, and changing (when necessary) a firm’s order routing
practices. It also should make reasonable efforts to ensure that a firm’s
employees adhere to the stated trade-management policy and procedures and
should delegate compliance responsibility to an appropriate, designated party
within the firm.
2. Implement a firm-wide trade management policy. Policies should be in
writing, available to all clients upon request, and distributed to all applicable
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employees. Firms also should educate employees as to the requirements and
recommendations contained in the policies.
3. Develop trade management procedures that adequately describe how a firm
will implement its trade management policy. In particular, the firm’s
procedures should: help identify and manage actual and potential conflicts of
interest resulting from trading activities; assist in the regular review of the
quality of services received from brokers; and adopt the AIMR soft dollar
standards.
4. Implement a trade measurement process. The Guidelines do not recommend
any particular trade measurement process. The Guidelines note, however, the
importance of having a process that enables the firm to analyze its total trading
costs and execution trends and to compare this information from period to
period, against appropriate objectives and benchmarks, and by broker, trading
venue and trading method.
B. Broker Selection
The Guidelines recommend that a firm establish clear firm-wide guidelines on broker
selection and develop an approved broker list. In establishing the firm’s guidelines and broker
list, the Guidelines recommend that firms:
1. Identify the broker characteristics necessary to meet client-trading needs and
select brokers according to these qualities. The Guidelines set forth specific
factors for firms to consider when evaluating a broker’s ability to obtain best
execution. These factors include a broker’s: (a) ability to minimize total trading
costs while maintaining its financial health; (b) level of trading expertise; (c)
infrastructure; (d) ability to provide specified information or services; and (e)
ability to provide services to accommodate special transaction needs.
2. Explore realistic and achievable alternative trading options. This evaluation
should consider technological developments and market changes that may help a
firm seek to achieve higher quality execution.
3. Develop an approved broker list. This list should include those brokers that can
execute trades at the lowest possible total cost while still meeting client portfolio
needs.
4. Establish a brokerage target allocation plan. A firm should project annual
trading activity and respective compensation for each broker on the approved
broker list and periodically compare the actual quantity of trades executed to the
projected amount. Large discrepancies discovered during this comparison
should be evaluated to determine, for example, whether there are opportunities
to obtain more trading value or if there have been violations of the firm’s trade
management policies and procedures.
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C. Monitoring and Evaluating Broker Performance and Execution Quality
The Guidelines recommend that a firm establish controls to monitor and evaluate broker
performance and execution quality. In doing so, the Guidelines recommend that a firm compile
and review: quarterly broker trading reports including, but not limited to, commission
summaries, transaction reports, and failed trades; information (e.g., audited financial
statements) adequately illustrating the broker’s financial condition; feedback from employees
having significant substantive contact with the broker; and trade measurement performance
information.
D. Fair Treatment of Clients
The Guidelines recommend that the firm’s policies and procedures ensure that all clients
are treated fairly in the execution of orders and allocation of trades.
II. DISCLOSURES
The Guidelines recommend that firms disclose their trade management practices as well
as any actual and potential trading-related conflicts of interest to all current and prospective
clients. Such disclosures should be transparent and made on a regular basis of not less than
once a year. In particular, the Guidelines recommend that a firm: disclose its order-routing
practices and any changes thereto to clients and prospective clients; ensure that the brokerage
arrangements and order-routing practices are consistent with the information disclosed on
Form ADV; and disclose actual and potential conflicts of interest.
III. RECORDKEEPING
The Guidelines recommend that a firm maintain meaningful and complete trading
records to assist it in evaluating whether it has achieved best execution. The Guidelines note
that firms should determine the appropriateness of making these records available to the public
and to clients. With respect to particular recordkeeping requirements, the Guidelines
recommend that a firm should:
A. Document the process used to select brokers and to oversee broker
performance. The Guidelines suggest that the firm’s records be able to:
demonstrate that it affirmatively considered factors during the broker selection
process; list the broker characteristics and other factors believed to benefit clients
most; and, document the post-trade analysis of execution quality and any steps
taken to improve the process.
B. Document the reasons for choosing a particular trading system.
C. Document actual and potential conflicts of interest and the controls in place to
prevent or mitigate any adverse effects these conflicts may cause.
D. Maintain documentation of the materials prepared for the TMOC and the
summaries of the TMOC’s deliberations as part of its oversight
responsibilities.
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E. Maintain records that support negotiated brokerage commissions. Firms
should establish an acceptable commission range for trades; document any
deviations from this range or from the approved broker list; retain client
instructions authorizing practices that may interfere with obtaining the most
favorable commission rate or net price; and document the nature, value, and
sources of soft dollar services obtained.
IV. INVITATION TO COMMENT
In connection with the proposed Trade Management Guidelines, AIMR has published
an “Invitation to Comment,” which lists specific questions that AIMR suggests commenters
focus on when preparing their comments. A copy of the Invitation to Comment is attached.
Among other things, the Invitation to Comment asks: if establishing a trade management
process will help firms analyze best execution; whether the Guidelines’ definition of best
execution is accurate, and, if not, to suggest a better alternative; if it is appropriate to have the
TMOC assess a firm’s capability to deliver best execution; if the Guidelines have focused on
appropriate broker characteristics to consider in developing approved broker lists; whether
there are any disclosures that firms should make that should be added to the Guidelines; and
whether there are any recordkeeping recommendations that should be added or deleted.
Ari Burstein
Associate Counsel
Attachment
Attachment (in .pdf format)