[15373]
November 22, 2002
TO: COMPLIANCE ADVISORY COMMITTEE No. 106-02
EQUITY MARKETS ADVISORY COMMITTEE No. 29-02
INVESTMENT ADVISERS COMMITTEE No. 26-02
SEC RULES COMMITTEE No. 92-02
RE: AIMR ADOPTS TRADE MANAGEMENT GUIDELINES
The Association for Investment Management and Research (“AIMR”) has adopted final
“Trade Management Guidelines.”1 The final Guidelines reflect comments received by AIMR on
the proposal, including many of the Institute’s comments.2 The most significant aspects of the
Guidelines are summarized below.
In general, the Guidelines are a compilation of recommended practices that AIMR
encourages investment management firms to adopt. Based on comments received on the
proposal, AIMR revised the Guidelines to reemphasize their voluntary nature. In this regard,
AIMR added language to the Guidelines that clarify that they are a series of recommendations
and not standards. AIMR also replaced references to “best practices” with “recommended
practices.” In addition, AIMR clarified the scope of the Guidelines. In particular, AIMR
clarified that the Guidelines apply to all types of transactions, including transactions in fixed-
income and derivative securities. However, in response to concerns by commenters that
applying the Guidelines to these types of transactions may be difficult given the lack of
available data for fixed income and illiquid trades, AIMR limited the recommendation to
measure the quality of trades to those securities with reliable and readily available comparative
data.
AIMR also responded to concerns by commenters that the Guidelines’ recommendations
differed from existing securities laws. In particular, AIMR stated that although existing legal
frameworks provide valuable information to the best practices setting process, it viewed the
underlying purpose of the Guidelines as being one that provides firms with information as to
1 The final Trade Management Guidelines can be found on AIMR’s website at
http://www.aimr.com/pdf/standards/trademgmt_guidelines.pdf. The adopting release of the final Guidelines,
which includes a summary of comments received on the proposal, can be found on AIMR’s website at
http://www.aimr.com/pdf/standards/tmg_adopt_rel.pdf.
2 Memorandum to Compliance Advisory Committee No. 14-02, Equity Markets Advisory Committee No. 9-02,
Investment Advisers Committee No. 3-02 and SEC Rules Committee No. 18-02, dated February 14, 2002.
2
what they “should do” versus what they “must do.” In addition, AIMR stated that the
Guidelines may serve as a positive example to regulatory organizations of a voluntary, industry
driven form of self-regulation. AIMR also stated that the Guidelines seek to provide guidance
to firms globally and to firms that fall out of the purview of the Investment Advisers Act of
1940. Therefore, AIMR decided that, where appropriate, the Guidelines would recommend “a
higher practice” than what is currently required by U.S. law and regulatory requirements.3
The Guidelines are divided into three areas: processes, disclosures, and recordkeeping,
each of which is discussed in more detail below.
I. PROCESSES
A. Trade Management Policies and Procedures
The Guidelines recommend that a firm establish formal trade management policies and
procedures. 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 would
have responsibility for evaluating a firm’s trade management policies and
procedures and for making recommendations, where appropriate, to senior
management to improve a firm’s trading practices. In response to commenters’
concerns over the proposed structure of the TMOC, the Guidelines include
additional language stating that the TMOC may be comprised of one person,
multiple persons, or various groups depending on the unique needs of each firm.
2. Implement a firm-wide trade management policy. Policies should be in writing
and available to all clients upon request.
3. Develop trade management procedures. The procedures would help a firm identify
and manage actual and potential conflicts of interests resulting from trading
activities and assist in the regular review of the quality of services received from
brokers. In response to comments received on the proposal, AIMR postponed the
inclusion of the recommendation to adopt the AIMR Soft Dollar Standards until
these Standards are further reviewed and possibly revised by AIMR.
4. Establish policies and procedures that address “client-directed brokerage
arrangements.” The Guidelines define a client-directed brokerage arrangement as
an arrangement whereby a client directs that trades for its account be executed
through a specific broker in exchange for which the client may receive benefits in
addition to execution services.
5. Implement a trade evaluation process. The Guidelines do not recommend any
particular trade evaluation process. The Guidelines, however, note the importance
3 AIMR revised many of the Guidelines’ definitions to make them consistent with the definitions of those terms as
used in the federal securities laws and eliminated many other definitions altogether (e.g., brokerage arrangement,
commission recapture program, internalization, preferencing of orders, strict price/time priority, and order flow
arrangement).
3
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. In response to comments that the proposed Guidelines placed too great an
emphasis on quantitative approaches to assess the quality of trades, AIMR clarified
that it did not intend to emphasize the importance of trade measurement to the
detriment of other evaluation factors related to best execution. The final Guidelines
therefore include language stating that measurement is one of numerous factors
available to firms to help them evaluate the quality of trades.
6. Implement compliance procedures that make reasonable efforts to ensure that a
firm’s employees adhere to the stated trade management policies and procedures.
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: identify the broker characteristics necessary to meet
client-trading needs and select brokers according to these qualities; explore realistic and
achievable alternative trading options; and perform an analysis of brokerage commission trends
and comparison of brokerage commission forecasts with actual brokerage commissions paid.
This final recommendation replaces a proposed recommendation that firms establish a
brokerage target allocation plan in response to concerns by commenters over the difficulty of
implementing such plans.
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
consider: quarterly broker trading reports including, but not limited to, commission summaries,
transaction reports, and failed trades; feedback from employees having significant substantive
contact with the broker; and trade evaluation process information. In response to objections by
commenters, AIMR eliminated the recommendation that firms review information adequately
illustrating the broker’s financial condition.
D. Fair Treatment of Clients
The Guidelines recommend that a 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. In response to concerns from commenters regarding certain of the conflicts to be
disclosed, AIMR replaced recommendations to disclose internalization, preferencing and
payment for order flow practices, and the use of principal trades, with a recommendation to
disclose to clients the use of an affiliated broker on an agency or principal basis.
4
III. RECORDKEEPING
The Guidelines recommend that a firm maintain meaningful and complete trading
records to support a firm’s efforts to achieve best execution for clients, disclosures to clients,
and broker selection practices. The Guidelines state that the recordkeeping recommendations
also may assist a firm in meeting its recordkeeping regulatory requirements and demonstrating
to regulators how it seeks to achieve best execution for its clients. With respect to particular
recordkeeping requirements, the Guidelines recommend that a firm should document: the
process used to select brokers and to oversee broker performance on an aggregate trading basis;
the review of the controls in place to prevent or mitigate any adverse effects that conflicts of
interest may cause on an aggregate trading basis; the materials prepared for and by the TMOC;
and records that support negotiated broker commissions.
Ari Burstein
Associate Counsel