SEC Issues Risk Alert On Investment Adviser Fees – Corporate/Commercial Law

United States:

SEC issues risk warning regarding fees for investment advisors

November 25, 2021

Michael Best & Friedrich

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Last week, the SEC’s Auditing Department released its observations on advisory fees charged by SEC-registered investment advisors (IAs). From double billing to holding unearned fees, the division had numerous shortcomings in the calculation of IA fees, disclosures, policies and procedures, and financial statements.

IAs were found to double-invoice clients, charge different fees than previously agreed, inconsistently reimburse unearned fees, and request written requests from clients for reimbursement of unearned consulting fees. Other IAs did not provide information that correctly reflected current fees and fee calculations and used advisory documents with inconsistent terms. Some IAs did not put in place written policies and procedures for billing and monitoring consultancy fees. Eventually, the department found many inaccuracies in the financial statements, such as failure to disclose financial distress and compensation expenses.

In light of these findings, the division recommends FAs:

• Adopt and implement written policies and procedures dealing with procedures and calculation of consultancy fees;
• Centralize the billing process and verify that fees are in line with compliance procedures, advisory agreements and disclosures;
• Use resources and tools to review fee calculations; and
• Properly record all consulting expenses and fees charged and received by clients, including those paid directly to the consulting staff.

While the alert doesn’t raise any new legal issues, it does suggest that the SEC is now focusing on clearing practices in its oversight of FAs. IAs should use this as an opportunity to review their billing practices for deficiencies.

The content of this article is intended to provide general guidance on the subject. Expert advice should be sought regarding your specific circumstances.

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