On April 12, 2018, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) issued a Risk Alert highlighting the most common compliance issues related to fees and expenses charged by investment advisers. A copy of the Risk Alert can be found at

Clients of investment companies rely on the disclosures provided to them to make investment decisions, including the important question of who to invest their money with. An integral part of the disclosures is the breakdown of advisory fees and expenses. The accuracy of the disclosures, and an investment adviser’s compliance with those disclosures, is essential.  As the Risk Alert itself states, “[a]n adviser that fails to adhere to the terms of these agreements and disclosures, or otherwise engages in inappropriate fee billing and expense practices, may violate the Investment Advisers Act of 1940…and the rules promulgated thereunder, including the antifraud provisions.”

The OCIE cited the most common compliance issues related to fees and expenses in an effort to “encourage advisers to assess their advisory fee and expense practices and related disclosures to ensure that they are complying with the Advisers Act, the relevant rules, and their fiduciary duty, and review the adequacy and effectiveness of their compliance programs.” The Risk Alert highlighted issues identified in deficiency letters from over 1,500 adviser examinations completed during the last two years. The issues and a sample of the examples provided by the OCIE are as follows:

Fee-Billing Based on Incorrect Account Valuations

  • The OCIE provided the example of advisers valuing assets using a different metric or a different process than that which was specified in the client’s advisory agreement.

Billing Fees in Advance or with Improper Frequency

  • The OCIE provided the example of billing a new client fees for an entire billing cycle rather than pro-rating the fee to reflect when the services actually began.

Applying Incorrect Fee Rates

  • The OCIE provided the example of charging non-qualified client performance fees based on a percentage of capital gains inconsistent with the Investment Advisers Act of 1940.

Omitting Rebates and Applying Discounts Incorrectly

  • The OCIE provided the example of advisers not aggregating client account values within the same household where doing so would have qualified the client for discounted fees.

Disclosure Issues Involving Advisory Fees

  • The OCIE provided the example of inconsistencies between a Form ADV fee information and an adviser’s actual billing practices.

Adviser Expense Misallocations

  • The OCIE provided the example of regulatory filing fees being charged the client rather than the adviser when that is not the arrangement disclosed in the materials.

This list is illustrative but not inclusive of all possible risks, weaknesses and issues related to advisory fees and billing practices. All fees and expenses must be calculated and collected in the appropriate amounts and methods described to the clients in the advisory agreement, Form ADV and/or any other materials provided. As the alert explains, some advisers have changed their policies and procedures and reimbursed clients for overbilled amounts in response to the OCIE’s focus on these issues.

The OCIE’s key takeaway is that all advisers should “review their practices, policies and procedures to ensure compliance with their advisory agreements and representations to clients in light of the fee and expense issues noted in the Risk Alert.”  The OCIE’s Risk Alert is a clear signal to advisers that the SEC is focused on billing practices, therefore advisers need to be focused on them as well. 

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