Alerts

Jul 31, 2018

Risk alert listing frequently found advisory fee and expense compliance issues from the Securities and Exchange Commission (SEC)

Recently, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) issued a risk alert that highlights the most frequent advisory fee and expense compliance issues identified in deficiency letters sent to registered investment advisers (RIAs).

According to OCIE “advisers must routinely review and revise their written policies and procedures to reasonably ensure they are compliant with the advisory agreements and disclosures given to their investors.”

Six frequently found deficiencies
The most frequently found and identified deficiencies by OCIE are as follows:

  1. Value error
    Billing clients based on improper valuations as determined by the advisory agreement.
    1. Can result by using assets that were supposed to be excluded from calculation, using a different value metric or otherwise making accounting errors using account values.
  2. Time error
    Billing fees in advance or at periods not consistent with those stated in the advisory agreement or otherwise disclosed to the client. Advisers routinely did not reimburse clients for prorated services where the entire billing period was not covered (i.e., client terminated service or started service mid-period).
  3.  
  4. Wrong rate
    Billing incorrect fees contrary to the advisory agreement or applicable law.
  5.  
  6. Insufficient credit
    Failing to apply agreed upon discounts and rebates to fees.
    1. For example, if incentive program discounts, multi-person household discounts and threshold discounts on rates were not properly applied as required by the advisory agreements.
  7. Undisclosed items
    Failing to disclose fees, billing procedures and other expenses that were being charged to clients either contrary to advisory agreements or in a way that made it unclear a client was being charged additional fees for services.
    1. For example, advisers were not disclosing that they were charging fees in excess of actual fees charged by third-party brokers and were not disclosing when they earned extra compensation due to fee sharing arrangements with third parties.
  8. Improper expense allocations
    1. Misallocating expenses to clients contrary to advisory agreements or other disclosures.
Registered investment advisers (RIAs) should continually review and update their written policies to avoid improperly charging fees or expenses to clients. Acting carefully to ensure clients are informed of their agreements and billed accordingly will not only help ensure compliance with the law, it is also a sound business policy.


This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client alert authored by Andrew S. May, Principal

A special thanks to Chuhak & Tecson law clerk Zachary Beaver for his contribution to this client alert.