OCIE identifies Advisory Fees and Expense Compliance Issues
18 April 2018
On April 12 2018, the United States Securities and Exchange Commission Office of Compliance Inspections and Examinations (OCIE) released a Risk Alert on the most frequent advisory fees and expense compliance issues observed during examinations of investment advisers. The compliance issues noted in the risk alert were the most frequently identified fees and expense issues from over 1,500 deficiency letters sent to advisers from examinations completed in the past two years.
The OCIE alert is designed to encourage advisers to assess advisory fees charged to clients and related disclosures, to help ensure that they are complying with the Investment Advisers Act of 1940, their fiduciary duty, and the effectiveness of their compliance programs.
Advisers have elected to change their practices, enhance policies and procedures, and reimburse clients overbilled amounts following the deficiency letters.
Advisory Fees and Expense Compliance issues identified
Fee-Billing Based on Incorrect Account Valuations – The OCIE staff observed advisers that incorrectly valued assets in clients’ accounts resulting in over billed advisory fees. For example, firms were using the market value of the account’s assets at the end of the billing cycle rather than the methodology that was specified in the advisory agreement, or were also including assets in the fee calculation that were excluded by the advisory agreement from the management fee, such as cash or cash equivalents.
Billing Fees in Advance or with Improper Frequency – OCIE staff observed certain advisers were billing outside of what was stated in the advisory agreement or disclosed in the firm’s Form ADV. OCIE also found firms were billing advisory fees monthly instead of on a quarterly, were billing in advance despite the advisory agreement specifying that clients would be billed in arrears, firms failing to pro-rate fees when advisory services began or ended mid-billing cycle.
Applying Incorrect Fee Rate – Certain advisers had also double-billed clients or charged a non-qualified client performance fees based on a percentage of their capital gains inconsistent with Section 205(a) (1) of the Advisers Act.
Omitting Rebates and Applying Discounts Incorrectly – There were advisers that did not apply certain discounts or rebates to their clients’ advisory fees in accordance with the advisory agreements and therefore overcharging clients. Advisers were not taking into consideration members of the same household for fee-billing purposes which would have normally meant discounted fees, not reducing a client’s fee rate when the value of that client’s account reached a prearranged breakpoint level, and were charging a client additional fees despite the client being part of a wrap fee program.
Adviser Expense Misallocations – Advisers to private and registered funds were also identified as misallocating expenses to the funds. For example, allocating travel expenses to clients instead of the adviser.
We can help
Bovill can provide a comprehensive review of policies and procedures and assist with remediating deficient disclosure practices, fee calculation and expense issues. We can also offer periodic internal testing of billing practices, as well as offer advice as it relates to how best to reconcile books and records against your custodian or fund accountant to ensure the net asset values are aligned. Find out more information about our adviser consulting services or get in touch with Katie below.