Best Execution: Fiduciary Duty (SEC 206)

To meet the best execution: fiduciary duty (SEC 206) requirement, you must consistently seek the most favorable terms reasonably available for client transactions and prove it with repeatable reviews, cost/share class analysis, and conflict disclosures. Operationalize it by formalizing broker/venue selection criteria, quarterly best execution reviews, and a share class governance process tied to disclosures and testing. (15 U.S.C. § 80b-6; SEC IA Best Execution Risk Alert (2019))

Key takeaways:

• Best execution is a fiduciary duty-of-care obligation; you need an evidence-backed process, not an outcome guarantee. (15 U.S.C. § 80b-6)
• Mutual fund share class selection and revenue sharing/clearing compensation are routine exam and enforcement triggers. (IA-6069; IA-6315 / Release No. 34-100691; 2024-exam-priorities; 2025-exam-priorities)
• Examiners look for periodic, documented reviews plus tailored policies that match your actual trading and product set. (SEC IA Best Execution Risk Alert (2019); Release No. 34-97114)

“Best execution” under an adviser’s fiduciary duty is an operational requirement: you must run a disciplined, repeatable process to obtain the most favorable terms reasonably available for client transactions, considering both quantitative and qualitative factors. This expectation shows up in SEC exam priorities and in enforcement actions that focus on avoidable client costs (especially mutual fund share classes), undisclosed conflicts (like clearing broker compensation or revenue sharing), and “paper” policies that are not implemented. (15 U.S.C. § 80b-6; SEC IA Best Execution Risk Alert (2019); 2024-exam-priorities; 2025-exam-priorities; IA-6069; IA-6315 / Release No. 34-100691; Release No. 34-97114)

For a CCO or GRC lead, the practical goal is simple: be able to answer, with records, “How do we decide where and how trades are executed, how do we review that decision, and how do we ensure clients are not put into avoidably expensive products?” This page gives requirement-level guidance you can implement quickly, including a step-by-step workflow, the exact artifacts to retain, and the exam questions that commonly expose gaps.

Requirement: Best execution as fiduciary duty under SEC 206

Under the Investment Advisers Act antifraud provisions, an investment adviser’s fiduciary duty of care includes seeking best execution for client transactions. (15 U.S.C. § 80b-6) Practically, this means:

• You select brokers, venues, and arrangements based on the most favorable terms reasonably available, not what benefits the firm.
• You evaluate total costs and execution quality, not just headline price.
• For mutual funds, you address share class cost differences and place clients in the lowest-cost share class available when multiple share classes exist for the same fund, absent a documented, client-benefiting rationale. (SEC IA Best Execution Risk Alert (2019); IA-6069; IA-6315 / Release No. 34-100691)

Plain-English interpretation (what exam staff expect you to mean)

Best execution is a “process requirement.” You are not guaranteeing every trade is the best possible fill. You are required to:

1. set decision criteria up front,
2. apply them consistently,
3. review outcomes periodically, and
4. correct course when data or conflicts indicate clients are not receiving favorable terms. (SEC IA Best Execution Risk Alert (2019); 2024-exam-priorities)

Who it applies to

This requirement applies to SEC-registered investment advisers and other investment advisers subject to Advisers Act fiduciary standards when they recommend, route, or execute client securities transactions, including:

• Advisers with discretionary authority that place trades for clients.
• Advisers recommending mutual funds (share class selection is part of “best execution” analysis for client costs). (IA-6069; IA-6315 / Release No. 34-100691)
• Wrap fee program sponsors and advisers operating wrap arrangements where embedded product fees can stack on top of advisory fees. (IA-6069)
• Advisers with clearing arrangements, revenue sharing, or other compensation that can bias execution or product selection. (IA-6315 / Release No. 34-100691; 2025-exam-priorities)

Operational contexts that increase scrutiny:

• Conflicts affecting impartial advice and best execution appear explicitly in SEC exam priorities. (2024-exam-priorities; 2025-exam-priorities)
• Firms with policies copied from templates that do not match actual operations have shown up in enforcement. (Release No. 34-97114)

Regulatory text

Provided excerpt (operationally relevant):
“An investment adviser's duty of care includes seeking best execution of securities transactions for advisory clients. Best execution means seeking the most favorable terms for a client transaction based on all relevant factors, including price, costs, speed, likelihood of execution, and qualitative considerations. For mutual fund investments, duty of care includes selecting share classes with lowest cost to clients when multiple share classes available.” (15 U.S.C. § 80b-6; SEC IA Best Execution Risk Alert (2019))

What an operator must do with that text:

• Convert “all relevant factors” into a documented evaluation rubric for your asset classes (equities/ETFs, options, fixed income, mutual funds) and your trading model (discretionary vs model-driven vs advisor-directed).
• Build a review cadence that tests whether your broker/venue/share class decisions still meet the rubric.
• Tie conflicts to disclosures and to your decisioning: if compensation or revenue sharing could influence routing or share class selection, you need both disclosure and an affirmative best execution analysis that addresses the conflict. (SEC IA Best Execution Risk Alert (2019); IA-6315 / Release No. 34-100691; 2025-exam-priorities)

Public enforcement cases

Use these as “what fails in real life” test cases for your program.

• In the Matter of Private Advisor Group, LLC (IA-6069) — Enforcement focused on wrap clients invested in mutual fund share classes with 12b-1 fees when lower-cost share classes were available. This maps directly to your share class governance and exception controls. (IA-6069)

• In the Matter of Cadaret, Grant & Co., Inc. (IA-6315 / Release No. 34-100691) — Enforcement addressed failures tied to disclosure of clearing broker compensation and revenue sharing conflicts alongside share class direction. This is the blueprint for why “conflicts + costs + documentation” must be managed as one system. (IA-6315 / Release No. 34-100691)

• In the Matter of E. Magnus Oppenheim & Co. Inc. (Release No. 34-97114) — Enforcement highlighted missing best execution reviews and compliance policies that were not tailored or implemented. This is a warning against “manual on the shelf.” (Release No. 34-97114)

What you actually need to do (step-by-step)

1) Map your execution ecosystem (scope and data)

Create an inventory that answers:

• Which brokers/custodians/clearing firms receive orders?
• Which venues are used (direct market access, “custodian platform,” third-party model provider)?
• Which products create embedded cost choices (mutual fund share classes, cash sweep programs, wrap programs)? (SEC IA Best Execution Risk Alert (2019); 2024-exam-priorities)

Output artifact: Execution & product map (brokers/venues/products/fee channels).

2) Define “most favorable terms” for each product type

Create a decision rubric with factors you will weigh and where the evidence comes from:

• Quantitative: explicit commissions, spreads, markups/markdowns, ticket charges, platform fees, fund expense ratios, 12b-1 fees where applicable.
• Qualitative: speed/likelihood of execution, market impact, broker responsiveness, error rates, operational resilience, and service quality. (SEC IA Best Execution Risk Alert (2019))

Output artifact: Best execution criteria matrix by asset class/product.

3) Build a mutual fund share class governance process

Minimum operational components:

• Share class matrix: for each commonly recommended fund, list available share classes and the lowest-cost option available to your clients on your platforms, plus eligibility constraints. (SEC IA Best Execution Risk Alert (2019); IA-6069; IA-6315 / Release No. 34-100691)
• Restrictions: in advisory and wrap accounts, prohibit share classes that add avoidable distribution costs (for example, 12b-1 fee share classes) unless an approved exception applies and is documented. (IA-6069)
• Exception workflow: define permitted rationales (e.g., platform limitation, client-directed holdaway, short-term fee considerations) and require pre-trade approval or post-trade remediation with timelines.

Output artifacts: Share class matrix; restriction rules; exception log; remediation tickets (if reclasses/exchanges are needed).

4) Establish periodic best execution reviews (documented)

Run recurring reviews that cover:

• broker/custodian/clearing arrangement costs and service,
• execution quality where measurable for your trading activity,
• mutual fund share class sampling and cost comparison,
• conflicts check (revenue sharing, clearing compensation) and whether disclosures still match reality. (SEC IA Best Execution Risk Alert (2019); 2024-exam-priorities; 2025-exam-priorities)

Governance model that works in practice:

• A best execution committee with minutes, data packs, decisions, and follow-ups.
• Defined thresholds for escalation (e.g., repeated higher-cost share class findings; persistent execution issues; new compensation streams). (SEC IA Best Execution Risk Alert (2019))

Output artifacts: Quarterly review package; committee minutes; action tracker; broker scorecards.

5) Align disclosures (ADV) to your actual conflicts and economics

Where clearing broker compensation, revenue sharing, or other payments exist, ensure disclosures:

• are specific to the arrangement,
• explain how it creates a conflict,
• describe how you mitigate and review best execution given that conflict. (IA-6315 / Release No. 34-100691; 2025-exam-priorities)

Output artifacts: ADV Part 2A conflict language; supporting fee schedules/agreements; annual disclosure review memo.

6) Test, correct, and prove it (surveillance + remediation)

Implement testing that finds issues before the SEC does:

• Share class testing: sample accounts and compare held share classes against your matrix; investigate deviations; reclass/remediate where required.
• Trade review: where you can, test for outliers (unusual costs, persistent poor fills, high error/cancel rates) and document follow-up. (SEC IA Best Execution Risk Alert (2019))

Output artifacts: Test scripts; sampling results; exceptions and remediation evidence; updated procedures.

7) Make the policies real (tailored, trained, followed)

Enforcement has cited failures where policies were not implemented or not tailored to the firm. (Release No. 34-97114) Your manual should match:

• your trading style and platforms,
• who does what (traders, advisors, operations, compliance),
• the cadence and required documentation.

Output artifacts: Written policies and procedures; training attestations; supervision checklists.

Required evidence and artifacts to retain (exam-ready)

Evidence	What it proves	Typical owner
Best execution policy & procedure	Defined process and responsibilities	Compliance
Broker/venue/clearing due diligence files	Initial selection basis	Trading/Operations
Quarterly best execution review packets	Ongoing monitoring and decisions	Compliance + Trading
Committee minutes + action tracker	Governance and follow-through	Compliance
Mutual fund share class matrix + update history	Cost governance and eligibility logic	Research/Compliance
Share class exception log + approvals	Controlled deviations	Compliance
Revenue sharing/clearing agreements + fee schedules	Conflict identification	Finance/Legal
ADV Part 2A disclosures + review memo	Client disclosure accuracy	Compliance/Legal
Testing results + remediation records	Detection and correction	Compliance/Operations

Exams routinely request these categories of documents. (2024-exam-priorities; 2025-exam-priorities; SEC IA Best Execution Risk Alert (2019))

Common exam/audit questions and hangups

Expect examiners to press on “show me” topics:

• “How do you define best execution for each asset class, and where is it documented?” (SEC IA Best Execution Risk Alert (2019))
• “How often do you review broker/custodian arrangements, and what data do you look at?” (2024-exam-priorities)
• “Do any third parties pay you (or your affiliates) in connection with client transactions or investments?” (IA-6315 / Release No. 34-100691)
• “How do you ensure clients are in the lowest-cost mutual fund share class available?” (IA-6069; IA-6315 / Release No. 34-100691)
• “Show the last review, the decision, and what changed afterward.” (SEC IA Best Execution Risk Alert (2019))

Hangup to anticipate: teams often have disclosure language but lack the underlying analysis connecting the conflict to best execution controls. (IA-6315 / Release No. 34-100691)

Frequent implementation mistakes (and how to avoid them)

1. Template policies with no operating proof. Fix: require a review packet template and minutes for each cycle; assign accountable owners. (Release No. 34-97114)
2. Treating share class selection as “investment research,” not best execution. Fix: add share class reviews to the best execution program and test them like trade execution. (IA-6069; SEC IA Best Execution Risk Alert (2019))
3. Disclosure without mitigation. Fix: document how you monitor for conflict-driven outcomes (share class drift, routing bias) and how you remediate. (IA-6315 / Release No. 34-100691; 2025-exam-priorities)
4. No exception discipline. Fix: require pre-approval or documented post-trade review for exceptions, with client-impact assessment and corrective actions. (SEC IA Best Execution Risk Alert (2019))

Enforcement context and risk implications

Recent SEC actions show best execution failures can drive material penalties, particularly where large client populations are affected or conflicts are undisclosed. Enforcement orders cited penalties including $5,800,000 (IA-6069) and $6,041,426 (IA-6315 / Release No. 34-100691). Those amounts illustrate why governance and documentation are not optional.

Best execution also intersects with exam priorities focused on conflicts and impartial advice. (2024-exam-priorities; 2025-exam-priorities) If your revenue model introduces third-party payments, treat your best execution program as a conflicts control, not only a trading control.

Practical 30/60/90-day execution plan

First 30 days (stabilize and scope)

• Build the execution ecosystem inventory (brokers, clearing, platforms, products, compensation streams). (SEC IA Best Execution Risk Alert (2019))
• Draft the best execution criteria matrix per product type.
• Stand up a share class matrix for top mutual fund holdings/recommendations and identify immediate “highest-risk” share classes for advisory/wrap accounts. (IA-6069; IA-6315 / Release No. 34-100691)
• Confirm ADV disclosures map to current clearing/revenue sharing arrangements. (IA-6315 / Release No. 34-100691)

Days 31–60 (implement controls and testing)

• Form a best execution committee and adopt a review packet template (agenda, data, decisions, actions). (SEC IA Best Execution Risk Alert (2019))
• Launch first periodic best execution review, including share class sampling and conflicts check. (SEC IA Best Execution Risk Alert (2019); 2024-exam-priorities)
• Implement an exception workflow for non-lowest-cost share class selections with approvals and remediation triggers. (IA-6069)

Days 61–90 (prove operation and harden)

• Complete a second review cycle or an interim follow-up on action items; document what changed.
• Train advisors/traders/operations on the procedures that touch their steps (routing, fund selection, exceptions, documentation). (Release No. 34-97114)
• Build an exam-ready evidence folder with the artifacts table above and a short “best execution narrative” that tells the story of your process.

Where Daydream fits: many teams lose time chasing “where is the evidence” across trading, operations, and disclosures. Daydream works well as the system of record for mapping controls to artifacts (review packets, minutes, exception logs) so you can answer exam requests quickly without rebuilding the file every cycle.

Frequently Asked Questions

Do we have to prove every trade got the best possible price?

You need to prove a reasonable, repeatable process to seek the most favorable terms considering relevant factors, and that you review and adjust that process over time. (15 U.S.C. § 80b-6; SEC IA Best Execution Risk Alert (2019))

Are mutual fund share classes really part of “best execution” for advisers?

Yes. The SEC has treated selection of higher-cost share classes when lower-cost alternatives are available as a best execution/duty of care failure in adviser enforcement. (IA-6069; IA-6315 / Release No. 34-100691)

What’s the minimum documentation an examiner will expect?

Written policies, documented periodic reviews, and evidence that share class and conflict issues are tested and remediated. Examiners also ask for disclosures and the agreements that create conflicts. (SEC IA Best Execution Risk Alert (2019); 2024-exam-priorities; 2025-exam-priorities)

How do we handle platform constraints where the lowest-cost share class isn’t available?

Document the constraint, evaluate alternatives (including other platforms or economically equivalent products where appropriate), and maintain an exception record showing why the selection still met your fiduciary duty of care under the circumstances. (SEC IA Best Execution Risk Alert (2019))

We receive clearing-related compensation or revenue sharing. Is disclosure enough?

Disclosure is necessary, but enforcement has focused on failures where the conflict existed and the firm did not align the economic reality to best execution analysis and controls. Your review process should explicitly test for conflict-driven outcomes. (IA-6315 / Release No. 34-100691; 2025-exam-priorities)

What caused problems in the E. Magnus Oppenheim case that we can avoid?

The SEC cited failure to conduct best execution reviews and inadequate, non-tailored compliance policies. Avoid “copied manual” risk by ensuring your procedures match your real trading and product activity and by keeping review records. (Release No. 34-97114)