Best Execution

B is correct. Best execution requires considering all relevant factors in the specific context. Here, the client's need to establish the position by market close for tax purposes makes certainty and speed of execution paramount. Broker X's guaranteed 1-hour execution meets this critical timing requirement, making it the best choice despite slightly higher costs and potential market impact. The risk of failing to execute (Broker Z) or missing the deadline (Broker Y's 3-hour window) would be worse than the additional costs.

A incorrectly prioritizes lowest commission over certainty of execution. Best execution is NOT synonymous with lowest cost; Broker Z cannot guarantee execution, creating unacceptable risk given the client's tax deadline. C overemphasizes market impact at the expense of certainty. While minimizing market impact matters, it is not always the primary consideration when execution certainty is critical. D is incorrect because splitting the order does not address the fundamental issue that only Broker X can guarantee timely execution, and unnecessarily complicating the execution could increase overall costs and risks.

C is correct. Best execution is defined as the duty to seek the most favorable terms reasonably available when executing client transactions. This requires considering multiple qualitative and quantitative factors including price, speed, likelihood of execution and settlement, commission costs, and market impact. No single factor is determinative; advisers must evaluate the totality of circumstances.

A is incorrect because best execution does NOT mean lowest commission. An adviser might reasonably pay higher commissions if other factors (speed, certainty, reduced market impact, better price improvement) provide superior overall value. B is incorrect because best execution relates to the quality of execution terms, not the speed of order placement. There is no 24-hour requirement. D is incorrect and potentially describes a soft dollar arrangement. Best execution requires evaluating execution quality, not selecting brokers based on research they provide to the adviser (which could be a conflict of interest).

C is correct. The adviser has satisfied best execution obligations by demonstrating that despite higher commissions (15% above average), the broker achieves superior price improvement (averaging $0.03 per share better than NBBO), resulting in net benefits to clients. The adviser also maintains documentation and conducts regular quarterly reviews, which demonstrates the required "regular and rigorous" evaluation of execution quality. Best execution focuses on overall favorable terms, not individual components.

A is incorrect because best execution does NOT require using the lowest commission rates. The total value proposition (price improvement, execution quality, certainty) matters more than any single factor. Here, the consistent price improvement more than offsets the 15% commission premium. B is incorrect because there is no regulatory requirement to diversify execution among multiple broker-dealers. Advisers may use a single broker if that broker consistently provides best execution and the adviser regularly evaluates this through documented reviews. D is incorrect because best execution does not require trade-by-trade disclosure. The higher commissions should be disclosed in Form ADV Part 2A as part of the adviser's general brokerage practices, but pre-trade disclosure is not required if the adviser can demonstrate overall best execution.

C is correct (the EXCEPT answer). The broker-dealer's willingness to provide free research to the adviser is NOT a legitimate best execution factor. This describes a soft dollar arrangement where the adviser might be tempted to use a broker based on services provided to the adviser rather than execution quality for the client. Selecting brokers based on benefits to the adviser (rather than client execution quality) violates fiduciary duty and best execution obligations.

A is a valid factor: Speed and likelihood of execution and settlement are core best execution considerations, especially for time-sensitive trades or illiquid securities. B is a valid factor: Total commission and transaction costs are quantitative factors that must be evaluated as part of overall execution quality. D is a valid factor: Market impact (how the trade itself might move the security's price) is particularly important for large orders or thinly traded securities and is a legitimate best execution consideration.

A is correct. Only statements 2 and 3 are accurate.

Statement 1 is FALSE: Best execution does NOT require using the broker with the lowest commission on every trade. Advisers must consider multiple factors (speed, certainty, price improvement, market impact) and may reasonably pay higher commissions if other factors provide superior overall value. Best execution is about the most favorable overall terms, not individual components.

Statement 2 is TRUE: Quarterly reviews are generally considered sufficient to satisfy the "regular and rigorous" review requirement for best execution. While no specific frequency is mandated by regulation, quarterly reviews are an industry best practice and demonstrate ongoing diligence in evaluating execution quality.

Statement 3 is TRUE: The adviser must maintain documentation of best execution reviews, including the committee's analysis, factors considered, data evaluated, and decisions made. This documentation demonstrates compliance with best execution obligations and provides evidence of reasonable diligence in seeking favorable execution terms.

Statement 4 is FALSE: Best execution requires seeking the most favorable terms "reasonably available," not guaranteeing the best possible price on every trade. Markets are dynamic and prices fluctuate. The standard is reasonable diligence and process, not perfect outcomes. Advisers cannot guarantee execution results but must demonstrate a reasonable process for seeking best execution.