Written Policies for Block Trades

July 25, 2005

Reading time : 2 minutes

Does your firm implement transactions on an aggregate (a/k/a bunching or block trade) basis? If so, have you established written policies and procedures laying out your firm’s aggregate trading activities? Do you disclose those procedures in your firm’s Form ADV or disclosure brochure?

The SEC has provided guidance for this type of activity and is mainly concerned that allocations are done in a fair and equitable manner. Basically, an advisor firm needs have procedures that ensure no client accounts are systematically disadvantaged.

In 1995, the SEC provided a no-action letter to SMC Capital, Inc. In its letter, the SEC provided the following guidance on how to implement and execute orders done on an aggregate basis.

Clients must receive equal treatment.

Each client participating in an aggregated order must receive the average share price for all of the advisor’s transactions in that security on any given day, with transaction costs shared pro rata based on participation.

The firm’s procedures need to be spelled out in the compliance and supervisory procedures manual. The policies also need to be disclosed in the Form ADV, provided to each affected client, and to the broker/dealers through which the orders are placed.

Properly completed trade ticket for the order must be prepared.

Partially filled orders must be filled pro rata based on the written aggregation statement.

Advisor must not receive additional compensation due to an aggregated order.

The firm’s books and records must reflect securities held by, or bought or sold for, participating client accounts.

If an order is filled in a manner different from the written policies, all clients must receive equal treatment and the written rationale for the departure must be approved by the CCO.

Client funds and securities must be deposited with custodians and will not be held collectively any longer than is necessary to settle the transaction.

We strongly encourage all advisor firms that aggregate client orders to follow these minimum guidelines. If you have any questions on what constitutes aggregating client orders or if your written policies and procedures are accurate, please give us a call.

Posted by Bryan Hill
Labels: Compliance Program