The SEC’s Division of Examination ran a sweep of exams focused on advisory fees, predominantly those charged to retail clients. Not bothering with any clever names, it was simply the Advisory Fees Initiative. The Division placed 130 examination into the Initiative. The results are in a recent Risk Alert: Division of Examinations Observations: Investment Advisers’ Fee Calculations. The sweep focused on three areas:
- Accuracy of the fees charged
- Accuracy and adequacy of disclosures around fees
- Effectiveness of the compliance program and firms’ books and records
There is no bigger conflict with the investment adviser’s fiduciary duty than fees. An investment adviser is literally taking money from it’s client and placing the money in the adviser’s hands.
To summarize the findings in the Risk Alert:
Mistakes were made.
The bad news: exams found lots of different ways that firms messed up billing and taking fees from clients. The good news: there were no novel findings.
I guess the second one isn’t really good news. Firms have been making these same mistakes for years. The Division points back to the 2018 Risk Alert that covers all of these same problems.
The additional emphasis in the 2021 risk alert is on disclosure. The exams identified
Form ADV Part 2 brochures and/or other disclosures, including disclosure that: (1) did not reflect current fees charged or whether fees were negotiable; (2) did not accurately describe how fees would be calculated or billed; and (3) was inconsistent across advisory documents, such as stating the maximum fee in an advisory agreement that exceeded the fees disclosed in the adviser’s brochure
The risk alert does emphasize that firms must have written policies and procedures addressing fee billing and the monitoring of fee calculations.
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