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(Article from Registered Funds Regulatory Update, January 2022)

For more information, please visit the Registered Funds Resource Center.

The Staff of the Division of Examinations released a Risk Alert identifying notable fee calculation deficiencies as well as related industry best practices in connection with a national initiative conducted by the Staff. The initiative focused on the numerous ways in which advisers charge advisory fees as well as the accuracy and adequacy of fee disclosures and the accuracy of the fees charged. The Staff conducted approximately 130 examinations of SEC-registered investment advisers under the initiative and observed deficiencies with a majority of the examinations.

The Staff observed a variety of fee calculation errors, including advisers using inaccurate percentages to calculate fees, incorrect breakpoint or tiered billing rates and incorrect client account valuations and double-billing. Several examined advisers either did not refund prepaid fees on terminated accounts or did not assess fees for new accounts on a pro-rata basis. The Staff also identified instances of false, misleading or omitted disclosures, missing or inadequate policies and procedures and inaccurate financial statements.

In light of the Staff’s findings, it recommends that advisers:

• adopt and implement written policies and procedures addressing the supervision, calculation, review and billing of advisory fees and validating fee calculations;
• centralize fee billing processes and validate that any client fees align with compliance procedures, advisory contracts and disclosures;
• utilize resources and tools established for reviewing fee calculations (g., checklists to reconcile client fee calculations with client advisory agreements); and
• properly record all client expenses and fees, including any fees paid directly to advisory personnel.

SEC Division of Examinations, Observations: Investment Advisers’ Fee Calculations
(Nov. 10, 2021), available at https://www.sec.gov/files/exams-risk-alert-fee-calculations.pdf.