The Division of Examinations (the “Division”) conducted exams of 130 retail advisers where the Staff reviewed fee and expense billing practices. Its latest Risk Alert (the “Alert”) details the results of these exams and is structured similarly to others released in 2021, whereby the Staff describes both deficiencies found as well as best practices. Of note, the Alert is a second consecutive one issued during the same week and exemplifies just how active the Exam Program has been lately.
Several types of deficiencies stood out to the examiners, such as:
- Inaccurate fees charged to accounts such as calculation errors, double billing, incorrect use of breakpoints or tiered rates, householding issues, and incorrect valuations
- Poor fee disclosures across disclosure documents
- Books and records that lacked requirements on fees and expenses
- Treatment of terminated accounts or prepaid fees that were mishandled or inconsistent
- Several disclosure issues were found that included not showing or disclosing the effect of cash flows on fees, timing of the fee calculation, valuations utilized, use of minimum fees or discounts available
- Written policies and procedures were often found lacking sufficient coverage of how fees are calculated, monitored, and billed; especially for hard to value assets or when fee offsets were utilized
- Inaccurate financial statements that did not properly account for fee income
Best practices found during the examinations included:
- Written policies and procedures that specifically addressed the supervision, calculation, review, and billing of fees
- Firms with a centralized billing process that was applied in a standardized way across all client accounts with consistent disclosures in advisory contracts, written policies, and Form ADV
- Use of robust reconciliation processes for fees charged in relation to fee language in advisory contracts
- Properly accounting for fees and expenses received/paid by clients to either the firm or its advisory representatives directly
As the calendar year-end approaches, it’s a good time to review fee and expense billing practices and disclosures in relation to the points made in the Alert. Corrective measures made now will fulfill compliance requirements and make fee and expense billing for 2022 go more smoothly.
