SEC Division of Examinations Issues Risk Alert on Investment Adviser Fee Calculations

November 12, 2021

On November 10, 2021, the staff (Staff) of the SEC’s Division of Examinations (Division) issued a Risk Alert (Risk Alert or 2021 Risk Alert) based on observations from the Division’s recently concluded national initiative (Initiative) that focused on advisory fees charged by registered investment advisers. The Staff conducted approximately 130 examinations of SEC-registered investment advisers and assessed the various ways in which investment advisers charge fees for their services, as well as evaluated the adequacy of fee disclosures and the accuracy of fee calculations.

In 2018, the Division published a risk alert (2018 Risk Alert) highlighting compliance issues the Staff observed relating to advisory fees. The 2021 Risk Alert supplements the 2018 Risk Alert by providing greater detail on certain compliance issues observed during the recent Initiative.

The Staff observed advisory fee-related deficiencies including the following: advisory fee calculation errors, such as over-billing of advisory fees, inaccurate calculations of tiered or breakpoint fees, inaccurate calculations due to incorrect householding of accounts; and not crediting certain fees due to clients, such as prepaid fees for terminated accounts or pro-rated fees for onboarding clients.

In the Alert, the Division encouraged advisers to review, refine, and improve, as appropriate, their fee billing policies, procedures, and practices and to address new risks as they are identified. In addition, the Division encouraged advisers to review their disclosures regarding such practices to ensure that clients are provided with full and fair disclosure of all fees and expenses and related material conflicts of interest. The Risk Alert noted that advisers that fail to adhere to the terms of their agreement and disclosures, or otherwise engage in inappropriate fee billing and expense practices, may violate their fiduciary duties and the Advisers Act, including its antifraud provisions.

The 2018 Risk Alert can be found here.

The 2021 Risk Alert can be found here.


Categories

Compliance, Cybersecurity, Exchange-Traded Funds (ETFs), Investment Advisers, Investment Companies, Miscellaneous, Mutual Funds, Regulatory