The SEC issued a risk alert yesterday that provided detail on certain compliance issues observed during recent Advisory Fees Initiative examinations, including additional details regarding the observations of the staff of the Division of Examinations (“EXAMS”) regarding fee-related deficiencies and compliance and disclosure issues. Registered investment advisers must have and follow policies and procedures that are reasonably designed to result in the fair and accurate charging of fees and must disclose their fees with sufficient clarity for their clients to understand the costs associated with their services.
Notable Deficiencies Regarding the Calculation of Advisory Fees
Notable deficiencies identified by the staff of EXAMS with regard to advisory fee calculations included the following:
- Inaccurate percentages were used to calculate advisory fees
- Advisory fees were double-billed
- Breakpoint or tiered billing rates were not correctly calculated
- Householding of client accounts were not correctly calculated
- Incorrect client account valuations were used
- Inconsistently refunding unearned fees
- Requiring clients to provide written requests to refund unearned advisory fees
- Disclosures that did not reflect current fees charged or whether fees were negotiable
- Disclosures that did not accurately describe how fees would be calculated or billed
- Disclosures that were inconsistent across advisory documents (e.g., stating the maximum fee in an advisory agreement that exceeded the fees disclosed in the Form ADV Part 2A)
Click here to see the complete Risk Alert from EXAMS and more specific information regarding the deficiencies that were found.
For more information about how your firm can ensure that it has adequate policies and procedures with regard to the calculation of advisory fees and that improve its compliance with the Compliance Rule, please contact NCA Compliance.
Hayley Nelson is the President and Principal Consultant of NCA Compliance, Inc., a compliance consulting firm providing a wide range of customized compliance solutions for investment advisors. Ms. Nelson previously worked for the Securities and Exchange Commission and a large investment manager in New York.
