What are two requirements of directed brokerage?

The correct answer highlights two critical requirements of directed brokerage, which are the disclosure of disadvantages and having written policies in place.

Directed brokerage refers to the process whereby an investment adviser directs a client's trades to a particular broker or dealer. When engaging in this practice, it is essential to ensure that clients are fully informed about any potential disadvantages associated with directed brokerage arrangements. This may include higher trading costs, lack of market access, or potential conflicts of interest. Disclosing these disadvantages is necessary to maintain transparency and uphold a fiduciary duty to clients.

Additionally, having written policies is crucial as it establishes a framework for how directed brokerage should be handled. Written policies provide guidance and consistency in the way the investment adviser approaches directed brokerage, ensuring compliance with applicable regulations and promoting ethical practices. These documented procedures help protect both the adviser and the clients by clearly outlining obligations and expectations.

Overall, these two requirements are fundamental to ensuring that clients make informed decisions and that advisers operate within a structured and compliant environment.