On November 10, 2021, the Securities and Exchange Commission’s Division of Examinations (the “Division”) issued a Risk Alert highlighting compliance issues related to advisory fee calculations and disclosures. These findings resulted from the recent National Advisory Fees Initiative that focused on retail clients. The Risk Alert is a follow-up to the April 12, 2018 Risk Alert, highlighting the most frequent compliance issues identified in examinations related to fee and expense practices.
The most recent Risk Alert discussed the following notable deficiencies:
Advisory Fee Calculations
Several advisers were charging fees inaccurately due to: (1) incorrect fee schedules, failure to convert clients to new or updated schedules, and errors in fees entered into portfolio management systems; (2) double billing due to oversight; (3) breakpoint or tiered billing incorrectly calculated or applied; (4) householding of client accounts not calculated correctly; and (5) inaccurate valuations used in calculations. The Division also found that some advisers did not refund prepaid fees on terminated accounts as described in their disclosures, advisory contracts or both. There were also inconsistencies in providing refunds to some clients, but not to others.
False, Misleading or Omitted Disclosures
A range of disclosure issues in the Form ADV Part 2A and/or other disclosure documents were identified, including: (1) not disclosing fees or whether fees were negotiable, (2) not accurately describing how fees would be calculated and the effect cash flows would have on fees charged, (3) inaccurate disclosures around billing for fees in advance or in arrears, (4) inconsistencies across advisory disclosure documents provided to clients, and (5) minimum fees and additional fees not properly disclosed.
Missing or Inadequate Policies and Procedures
Some advisers did not maintain written policies and procedures addressing fee billing and monitoring of fee calculations, or the policies and procedures were generic in nature and did not specifically address computing, billing and testing of fees. The Division also expressed concerns around missing components related to the valuation of illiquid assets, fee offsets, fee reimbursements for terminated accounts and prorating fees due to cash flow activity.
Inaccurate Financial Statements
The Division observed issues or inaccuracies in financial statements. This included: (1) not recording all fee income received, (2) not recording pre-paid fees as liabilities and (3) not recording advisory fees paid directly to investment adviser representatives.
Greyline recommends that advisers revisit their policies and procedures around advisory fees in light of this Risk Alert. Investment advisers should expect fee calculations and billing to continue to be an area of focus during SEC examinations. Please reach out to your Greyline representative with any questions. The SEC Risk Alert can be found here.
