SEC Issues Risk Alert on Investment Advisers’ Fee Calculations

On November 10, 2021, the Division of Examinations of the Securities and Trade Fee (the Workers) issued a risk alert setting forth notable charge calculation-related deficiencies and associated business greatest practices noticed by the Workers in a just lately accomplished nationwide examination initiative of funding advisers. By way of the examination initiative, the Workers recognized deficiencies with a majority of advisers examined. Within the alert, the Workers famous that charge calculation-related deficiencies usually end in monetary hurt to shoppers, and should contain violations of an adviser’s fiduciary obligation to shoppers and necessities below the Investment Advisers Act of 1940. Fee calculations and associated disclosure have been a continued focus of the Workers lately.  Advisers could be well-served to be aware of the Workers’s observations relating to business greatest practices:

  • Undertake and implement written insurance policies and procedures addressing advisory charge billing processes and validating charge calculations. Advisers ought to have written insurance policies and procedures addressing (a) advisory charge computing, billing and testing, and (b) monitoring of charge calculations. Advisory charge computing ought to embrace all vital parts related to an adviser’s enterprise. Examples of such vital parts recognized by the Workers embrace: (i) valuation of illiquid or difficult-to-value property, (ii) charge offsets, (iii) pre-paid charge reimbursements for terminated accounts, (iv) prorating charges for additions or subtractions to accounts, (v) household account aggregation (householding) and (vi) the applying of breakpoints for charge calculations.

  • Centralize the charge billing course of and validate that the charges charged to shoppers are in step with compliance procedures, advisory contracts, and disclosures. The Workers famous that advisers with a centralized course of for advisory charge calculation and invoicing had extra constant charge billing practices.

  • Guarantee sources and instruments established for reviewing charge calculations are utilized. The Workers noticed that advisers using checklists and comparable sources to reconcile charge calculations with advisory agreements had extra constantly correct charge calculations. 

  • Correctly document all advisory bills and charges assessed to and acquired from shoppers. 

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