Top Six Fee/Expense Compliance Issues for RIAs

The SEC’s exam division recently released a Risk Alert detailing the top six compliance failures relating to fees and expenses charged by investment advisors, as identified through client deficiency letters.

The objective of the Risk Alert is to encourage advisers to assess their advisory fee and expense practices and related disclosures to ensure that they are complying with the Advisers Act, the relevant rules, and their fiduciary duty, and review the adequacy and effectiveness of their compliance programs.

The top six fee and expense compliance issues are:

Fee-Billing Based on Incorrect Account Valuations

OCIE staff has observed advisers that incorrectly valued certain assets in clients’ accounts resulting in overbilled advisory fees. Because advisers generally assess fees as a percentage of the value of assets they manage in each client’s account, an incorrect account valuation will lead to an incorrect advisory fee being assessed to that client.

Billing Fees in Advance or with Improper Frequency

OCIE staff has observed issues with advisers’ billing practices relating to the timing and frequency for which advisory fees were billed. For example, some advisors billed advisory fees on a monthly basis, instead of on a quarterly basis as stated in the advisory agreement or disclosed in Form ADV Part 2. Similarly, staff observed advisers that billed advisory fees in advance, despite the advisory agreement specifying that clients would be billed in arrears.

Applying Incorrect Fee Rate

OCIE staff has observed advisers that applied an incorrect fee rate when calculating the advisory fees charged to certain clients. For example, some advisors applied a rate higher than what was agreed upon in the advisory agreement or double-billed a client.

Omitting Rebates and Applying Discounts Incorrectly

OCIE staff has observed advisers that did not apply certain discounts or rebates to their clients’ advisory fees, as specified in the advisory agreements, causing the clients to be overcharged. For example, staff observed advisers that did not aggregate client account values for members of the same household for fee-billing purposes, which would have qualified such clients for discounted fees according to the adviser’s Form ADV or advisory agreement.

Disclosure Issues Involving Advisory Fees

OCIE staff has observed several issues with respect to advisers’ disclosures of fees or billing practices. For example, staff observed advisers that made a disclosure in the Form ADV that was inconsistent with their actual practices, such as advisers that disclosed in the Form ADV a maximum advisory fee rate, but nevertheless had an agreement with a certain client to charge a fee rate exceeding that disclosed maximum rate.

Adviser Expense Misallocations

OCIE staff has observed advisers to private and registered funds that misallocated expenses to the funds. For example, staff observed advisers that allocated distribution and marketing expenses, regulatory filing fees, and travel expenses to clients instead of the adviser, in contravention of the applicable advisory agreements, operating agreements, or other disclosures.

To read the complete Risk Alert, click here.