In a new risk alert, the SEC Division of Examinations (the "Division") identified common compliance deficiencies related to supervision, disclosure, billing and calculation of advisory fees, among others.
In its examinations, the Division observed the following deficiencies:
- inaccurate calculations of advisory fees or account valuations, instances of over-billing, incorrect tiered or breakpoint fees and the improper "householding" of accounts;
- the failure to refund unearned fees due to clients, such as prepaid fees for terminated accounts and fees that were not assessed on a pro rata basis for new clients;
- fee-related disclosure issues, including omitted or misleading Form ADV Part 2 disclosures, and inaccurate disclosures regarding the valuation and timing of billing; and
- inadequate policies and procedures related to advisory fee billing, and the testing and monitoring of fee calculations.
The Division stressed the following practices for the investment adviser industry: (i) adequate implementation of written policies and procedures addressing supervision, billing and the calculation of advisory fees; (ii) centralized account and fee billing, accompanied with validation that fees charged are consistent with compliance procedures, contracts and disclosures; (iii) the implementation and usage of tools (e.g., checklists) for reviewing fee calculations; and (iv) accurate recordkeeping for all advisory expenses, fees and monies assessed to or received from clients.
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