DOE in recent Risk Alert Notes Fee Deficiencies and “Financial Harm to Clients”
The SEC’s Division of Examinations (DOE) recently examined 130 advisers with a wide range of AUM and business models, focusing on advisory (and other) fees charged to retail clients and reviewing advisers’ policies, procedures and practices relating to fees.
The DOE identified a myriad of issues, noting that the deficiencies observed often “resulted in financial harm to clients.”
Update your Policies and Procedures: Investment Adviser CCOs should examine fee policies and procedures, fee calculations, and all fee disclosures – including the Form ADV and investment management agreements.
Pain Points: New and changed relationships may alter existing fee schedules. Evolving sales practices, new sources of referrals and mergers with other advisers have the potential of creating multiple fee schedules and billing inconsistencies, creating compliance and testing issues.
Although the DOE recommends that Advisers should review this new Risk Alert “in conjunction with” the prior Advisory Fees Risk Alert issued in 2018, many of the same issues were identified.
Deficiencies noted with regard to charging fees including the following:
• Inaccurate fee billing, due to a number of errors including
o Incorrect fee percentage;
o Double billing following some type of change within the organization;
o Incorrect application/calculation of tiered billing schedules;
o Errors in valuation of multiple accounts within a single household;
o Incorrect valuations due to a number of administrative and other errors;
o Not pro-rating fees or refunding fees in the event of startup of an account or termination of services during a quarter;
o inconsistency of fee application; and
o requiring terminated clients to request refunds.
Deficiencies noted with regard to fee disclosures:
• Inaccurate fee disclosures in Form ADV Part 2;
o Incorrect rates;
o Didn’t say that fees may be negotiable;
o Didn’t accurately describe fee practices.
• Inconsistencies among documents such as investment advisory agreements and the ADV Part 2;
• Absence of fee schedules in client agreements;
• Inconsistencies between disclosures and actual practices,
• Incomplete or inaccurate disclosures relating to cash flows and their effect on fees;
• Inaccuracies in descriptions of calculation methods;
• Lack of disclosures regarding the timing of billing; and
• Inaccurate and/or incomplete disclosures related to valuation methods, minimums, extra fees, and discounts.
Deficiencies noted with regard to Policies and Procedures
The examined advisers were cited for
• Policies and procedures that did not include reviewing and testing fee calculations,
• Policies that didn’t include procedures and/or review of
o valuation policies,
o fee offsets,
o adjustments for terminated accounts,
o pro-rating fees and/or
o calculating fees on aggregated accounts.
• Inaccurate financial reporting with respect to fees.
Acknowledging that all advisers have different business models, DOE provided an example of policies and procedures to assist advisers with compliance.
You can read the 2021 Risk Alert here and the 2018 Risk Alert here.