SEC Issues Alert on Advisory Fees and Expenses

Today the Office of Compliance Inspections and Examinations (OCIE) issued another National Exam Program Risk Alert (the “Alert”). The Alert focused on the findings from 1,500 adviser examinations conducted over the past two years. Of concern from those examinations, OCIE staff found that many firms failed in some way regarding the application or disclosure of advisory fees and expenses.

In summary, the Alert highlighted the following exam findings regarding fees and expenses:

  • Fees based upon incorrect valuations
  • Valuation metrics were utilized that were not as disclosed to clients
  • Formulary issues such as utilizing quarter-end balance value as opposed to average daily balance of the account as described and disclosed to clients, or simply applying an incorrect rate
  • Incorrectly including assets in the calculation that were supposed to be excluded (i.e., cash, alternatives, annuities)
  • Timing of the calculation such as monthly billing when quarterly billing was agreed to by client or not pro-rating advisory fees upon termination of an account
  • Omitting rebates or not applying applicable discounts (i.e., account breakpoints or householding discounts)
  • Disclosing maximum fees in client disclosure documents (Form ADV), but assessing higher fees for certain clients
  • Incorrectly applying performance-based fees on non-qualified clients in violation of Section 205(a)(1)
  • Expenses received from third parties servicing accounts (above actual fees charged to client) that were not adequately disclosed to client
  • Lack of disclosures regarding fee sharing arrangements with affiliates
  • Misallocated private fund expenses in contravention of fund offering documents and agreements

Advisory firms are encouraged to review their valuation practices and disclosures to ensure they are properly charging client advisory fees and expenses and that all have been adequately disclosed.

View the National Exam Program Risk Alert, “Overview of the Most Frequent Advisory Fee and Expense Compliance Issues Identified in Examinations of Investment Advisers,” April 12, 2018.