Trade Execution

B is correct. Best execution requires evaluating all relevant factors in context. Here, the client's need for quick execution for portfolio rebalancing makes speed and certainty paramount. Venue A provides guaranteed immediate execution of the full 10,000 shares, eliminating execution risk. The $0.02 price premium ($200 total on 10,000 shares) is minimal compared to the risk of partial fills or execution delays that could compromise the rebalancing strategy.

A incorrectly prioritizes potential lowest price over execution certainty. Venue C cannot guarantee timing or complete fill, creating unacceptable risk given the client's need for quick position establishment. The potential 2-cent savings is not worth the execution uncertainty. C creates execution risk by splitting the order (7,000 immediate, 3,000 over the next hour), exposing the remaining 3,000 shares to price volatility and potential adverse price movement during the delay. D unnecessarily complicates execution and increases costs and risks without addressing the fundamental need for fast, certain execution.

C is correct. Best execution in trade execution means seeking the most favorable terms reasonably available by considering multiple factors including price, speed of execution, likelihood of execution and settlement, commission costs, and market impact. No single factor is determinative; the duty requires evaluating the totality of circumstances to achieve overall favorable terms for the client.

A is incorrect because best execution does NOT mean lowest commission. An adviser might reasonably pay higher commissions if other factors (better price, faster execution, reduced market impact) provide superior net 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 execution requirement. D is incorrect because best execution requires seeking favorable terms "reasonably available," not guaranteeing the best possible price. Market conditions are dynamic, and the standard is reasonable diligence in process, not perfect outcomes.

C is correct. The adviser has satisfied best execution obligations by demonstrating that despite 10% higher commissions, the broker delivers superior overall value: $0.04/share average price improvement (far exceeding the commission premium), 99.8% complete fill rate (minimizing execution risk), and 15-second faster execution (reducing market exposure). The adviser also maintains quarterly documentation, demonstrating the required regular and rigorous evaluation of execution quality. Best execution focuses on total value, not individual cost components.

A is incorrect because best execution does NOT require lowest commissions. The quantifiable benefits (price improvement, faster fills, higher completion rates) more than offset the 10% commission premium, providing net value to clients. B is incorrect because there is no regulatory requirement to diversify execution among multiple brokers. Advisers may use a single broker if that broker consistently provides best execution and the adviser regularly documents this evaluation. D is incorrect because best execution does not require trade-by-trade disclosure. The broker relationship and commission structure should be disclosed in Form ADV Part 2A, but individual pre-trade notifications are not required if the adviser can demonstrate overall best execution.

C is correct (the EXCEPT answer). The holding period for capital gains tax purposes begins on the TRADE DATE (execution date), NOT the settlement date. This is a critical tax rule: investors "own" the security for tax purposes when the trade executes, even though payment and delivery occur one business day later at settlement (T+1 for equities as of May 2024).

A is accurate: Trade execution is when the buy or sell transaction is completed, the price is established, and both parties are committed to the trade. This occurs on the trade date (T). B is accurate: The standard settlement cycle for equity transactions is T+1 (as of May 28, 2024), meaning securities and cash change hands one business day after execution. D is accurate: SEC rules require broker-dealers and advisers to send trade confirmations to clients at or before completion of the transaction (settlement date), detailing execution price, quantity, commissions, and settlement date.

B is correct. Statements 1, 2, and 4 are appropriate execution quality factors.

Statement 1 is TRUE: Price improvement (execution price better than NBBO) is a key execution quality metric. Higher price improvement rates indicate the broker is obtaining better prices than the public market quotes, directly benefiting clients. This is a core quantitative execution quality measure.

Statement 2 is TRUE: Execution speed (time from order submission to fill) is an important quality factor. Faster execution reduces market exposure and the risk of adverse price movements between order submission and completion. This is particularly critical for large orders or volatile securities.

Statement 3 is FALSE: The broker's willingness to provide free research to the adviser is NOT a legitimate execution quality factor. This describes a soft dollar arrangement where the adviser might select a broker based on benefits to the adviser rather than execution quality for clients. Choosing execution venues based on adviser benefits violates fiduciary duty and best execution obligations.

Statement 4 is TRUE: Fill rate (percentage of orders filled completely on first execution) is a valid execution quality measure. Higher fill rates reduce execution uncertainty, minimize market exposure from delayed partial fills, and decrease the risk of adverse price movement while waiting for complete execution. This is especially important for liquidity-sensitive or time-sensitive trades.