SEC Risk Alert Reveals Common Billing and Disclosure Deficiencies
Vigilant Insights
Introduction
The SEC recently issued a Risk Alert highlighting deficiencies identified during examinations of Investment Advisers related to fee billing practices, compensation arrangements, and conflicts of interest disclosures.
According to the SEC, examiners observed instances where Advisers provided incomplete, misleading, or, in some cases, no disclosure regarding conflicts of interest and risks associated with fees and compensation. The SEC also found examples where Advisers’ billing practices were inconsistent with advisory agreements and client disclosures.
The Risk Alert identified several areas where disclosures were found to be deficient, including:
- Cash management and sweep account arrangements where advisers received revenue in exchange for recommending certain accounts.
- Revenue-sharing programs tied to Money Market Funds.
- Mutual Fund compensation arrangements, including 12b-1 fees.
- Revenue opportunities associated with clearing brokers, margin lending, and custodial relationships.
The SEC also highlighted billing-related deficiencies, including incorrect fee rates, charging fees on inactive or terminated accounts, improper fee calculations, and failures to apply agreed-upon fee reductions or rebates. Additionally, the SEC noted weaknesses in compliance programs governing billing practices and encouraged advisers to routinely review their billing policies, procedures, disclosures, and conflict-of-interest frameworks.
Vigilant Chief Operating Officer, Chuck Martin, MBA, shared his insights with Financial Advisor IQ regarding the SEC’s Risk Alert. His observations and key takeaways are highlighted below.
Chuck Martin Insights
Chuck noted that the SEC’s use of the term “economic conflict of interest” in the Risk Alert is noteworthy and reflects the Commission’s current regulatory focus.
According to Chuck, the alert “aligns with what we see as the current regulatory environment, where the SEC is currently pursuing cases of not pure technical violations [but] rather instances where they can show investor/client harm.”
His observation suggests that Advisers should continue to focus not only on technical compliance requirements, but also on identifying and addressing conflicts and practices that could potentially impact clients.
Vigilant’s Conclusion
The SEC’s latest Risk Alert serves as a reminder that fee billing practices, compensation arrangements, and conflict-of-interest disclosures remain important examination priorities.
Firms should evaluate whether their disclosures accurately describe how compensation is received, whether billing practices align with client agreements, and whether policies and procedures are sufficiently designed to identify and address conflicts of interest. Particular attention should be directed toward revenue-sharing arrangements, cash management programs, fee calculations, and on-going compliance testing surrounding billing operations.
As regulators continue to focus on areas where investor harm may arise, Firms that proactively review their disclosures, billing controls, and conflict management processes may be better positioned for future examinations and regulatory scrutiny.