During recent regulatory exams, the SEC detected several issues with investment advisers’ fee calculations.
The SEC wants to see that firms have:
- Adopted, and are following, policies and procedures that adequately address fair and accurate charging of fees; and,
- Disclosed their fees with clarity for their clients.
Of the approximately 130 Firms that were examined, the SEC noticed that many had deficiencies including with regard to:
- advisory fee calculation errors;
- overbilling clients;
- inaccurate calculations of tiered or breakpoint fees; and,
- unfair charges for terminated accounts.
WHAT DID THEY FIND?
Inaccurate Advisory Fee Calculations
- The wrong percentages were used to calculate advisory fees, fees were double-billed due to lapses in oversight, breakpoint rates were not properly accounted for, householding of client accounts were not correctly calculated; some family accounts were not properly aggregated, and account were not valued properly.
Unfair Termination Practices
- Advisers did not pro-rate or refund accounts that terminated in the middle of a billing cycle: refunds of unearned fees were inconsistent, and clients were improperly required to provide written requests for refunded advisory fees
False, Misleading, or Omitted Disclosures
- Form ADV Part 2 disclosures did not reflect: current fees charged, whether fees were negotiable, and how fees were calculated and billed:
- Cash flows and their effect on fees
- Timing of advisory fee billing
- Valuation for fee calculations
- Minimum fees, extra fees, and discounts
Missing or Inadequate Policies and Procedures
- Advisers did not maintain written policies and procedures addressing advisory fee billing, monitoring of fee calculations, and billing, or both: Policies failed to specifically address fee calculations and material advisory fee components including how to value illiquid assets
Inaccurate Financial Statements
- Advisory fees were inaccurately reflected in financial statements: such as not recording all advisory fee income, administrative fee revenue, and compensation expenses in general ledgers and on financial statements, using a cash basis of accounting but preparing financial statements on an accrual basis of accounting.
Other SEC Observations regarding adequate industry practices-
The SEC noted that advisers who had fewer billing errors in these areas had:
- Adopted and implemented written policies and procedures addressing advisory fee billing processes and validated fee calculations.
- Maintained a centralized fee billing process and were consistent with their procedures, contracts and disclosures.
- Utilized checklists and other methods to reconcile fee calculations
- Maintained proper recordkeeping for all fees and expenses
WHAT DOES THIS MEAN FOR ME?
The SEC projects that fee calculations and billing have been, and continues to be, an area that requires routine review during examinations. Fairview Investment Services provides routine testing and evaluations of adviser practices to ensure firms are remaining compliant with SEC regulations.
If your firm requires assistance with understanding and staying up to date with SEC regulations, Fairview can help. We can help firms register with the SEC and support registered investment advisers by creating and implementing comprehensive, sustainable compliance programs with the help of our in-house regulatory experts. Contact us today for more information about our services.