Published on Nov 11th, 2021 |

SEC Releases | Risk Alert

The Division of Examinations (the “Division”) released a Risk Alert yesterday, November 10th, concluding that the Division Staff completed a national initiative that focused on advisory fees, fee disclosures, accuracy of fee calculations, and more specifically those charged to retail clients.

Most of the examined advisers were found with an identified deficiency relating to their advisory fees charged. The following deficiencies found below resulted in financial harm to clients.

  1. Advisory Fee Calculation Errors
    • Over-billing of advisory fees;
    • Inaccurate calculations of tiered or breakpoint fees; and
    • Inaccurate calculations due to incorrect householding of accounts.
  2. Clients not Credited with Certain Fees they are due
    • Prepaid fees for terminated accounts; and
    • Pro-rated fees for onboarding clients.
  3. Fee-Related Compliance and Disclosures Issues

It is important to note that the majority of the examined advisers provided investment advice to retail clients. The examiners focused on the following areas below for advisory fees.

  • The Accuracy of Fees Charged by the Examined Advisers;
  • The Accuracy and Adequacy of the Examined Advisers’ Disclosures; and

The Effectiveness of the Examined Advisers’ Compliance Programs and Accuracy of their Books and Records.


Staff Observations

The Division Staff provided two key areas that occurred during their staff observations, which were Notable Deficient Practices, and Notable Industry Practices to follow.

A quick overview of deficient practices, and proper industry practices to follow, are below.

Deficient Practices:

  • Advisory Fee Calculations
    • Advisory fees charged inaccurately from examined advisers.
    • No refund on prepaid fees for terminated accounts, or they did not assess fees for new accounts on a pro-rata basis.
  • Misleading Disclosures
    • A range of disclosure issues were found from several examined advisers.
  • Missing Policies and Procedures
    • Written policies and procedures were not sustained by examined advisers. Advisory fee billing, monitoring of fee calculations and billing, or both combined were issues that were found not being maintained.
  • Inaccurate Financial Statements
    • Failure of examined advisers to record pre-paid advisory fees as liabilities or maintain their financial statements.

Industry Practices to Follow:

  • Adopt and implement written policies and procedures addressing advisory fee billing
    processes and validating fee calculations.
  • Making sure that the fees charged to clients are consistent with compliance procedures, advisory contacts, and disclosures.
    • Centralizing the fee billing process.
  • Confirming that the tools and resources accepted for reviewing fee calculations are utilized.
  • Appropriately record all advisory expenses and fees assessed to and received from clients which include those paid directly to advisory personnel.


Brief Synopsis

A key takeaway from this Risk Alert is to make sure that you are implementing a consistent routine for Advisory fee calculations and billing, because this is an area that needs to have frequent investment adviser examinations.

As a closing recommendation from the Division, they stated that it is encouraged to continuously stay up to date with your billing policies, procedures, and practices to make sure that new risks are being addressed as they are identified. Making sure that clients are provided with full and fair disclosure of all fees and expenses is the biggest focus when relating to a client’s perspective.

Need an Extra set of Eyes on your Compliance Policies, Procedures, and Practices? Click here to Contact Us.