Last week, the SEC’s office of Compliance Inspections and Examinations released a risk alert on Most Frequent Advisory Fee and Expense Compliance Issues Identified in Examinations of Investment Advisers. It was a bit shocking.
Shocking mostly because the issues are mostly mechanical procedural errors that were contrary to the investment advisory agreement:
- Using a different valuation method (cost versus fair value)
- Using the market value at the end of the billing cycle instead of an average value
- billing monthly instead of quarterly
- billing in advance instead of in arrears
These are obvious mistakes, but not necessarily adverse to the client.
Others deficiencies did lead to increase costs to investors:
- Failure to prorate for a partial billing cycle
- Applying a higher rate
- Charging additional fees
- Charging more that the agreed to maximum rate
- failing to aggregate client accounts for members of the same household which would have qualified the accounts for a discounted fee
Although the Risk Alert is focused on retail investment advisers, private funds do not get by unscathed.
OCIE staff has observed advisers to private and registered funds that misallocated expenses to the funds. For example, staff observed advisers that allocated distribution and marketing expenses, regulatory filing fees, and travel expenses to clients instead of the adviser, in contravention of the applicable advisory agreements, operating agreements, or other disclosures.