OCIE Issues Risk Alert on the Most Frequently Identified Advisory Fee and Expense Compliance Issues

April 16. 2018

The staff of the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) recently issued a Risk Alert on the most frequent advisory fee and expense compliance issues identified in examinations of investment advisers. In the Risk Alert, OCIE staff emphasized the importance of disclosures regarding advisory fees and expenses to the ability of clients to make informed decisions, including whether or not to engage or retain an adviser. Below is a summary of the deficiencies identified by OCIE staff pertaining to advisory fees and expenses.

Fee-Billing Based on Incorrect Account Valuations

OCIE staff observed advisers incorrectly valued client account assets resulting in overbilled advisory fees. Specifically, client assets were valued using a different metric or process than specified in the client’s advisory agreement, such as (i) using original cost rather than fair market value to value an illiquid asset; (ii) using the market value of the account’s assets at the end of the billing cycle instead of using the average daily balance of the account over the entire billing cycle; or (iii) including assets (e.g., cash or cash equivalents) in the fee calculation that were excluded from the management fee by the advisory agreement.

Billing Fees in Advance or with Improper Frequency

OCIE staff observed issues relating to the timing and frequency for which advisory fees were billed. For example, OCIE staff observed advisers that, contrary to the advisory agreement and disclosures in Form ADV Part 2, (i) billed advisory fees on a monthly basis instead of on a quarterly basis; (ii) billed advisory fees in advance rather than in arrears; or (iii) billed a new client for advisory fees for an entire billing cycle rather than pro-rating such charges to reflect that the client’s account began mid-billing cycle.

Applying Incorrect Fee Rate

OCIE staff observed advisers that applied an incorrect fee rate when calculating advisory fees. Specifically, OCIE staff found advisers that (i) applied a higher rate than what was agreed upon in advisory agreements; (ii) double-billed a client; or (iii) charged a non-qualified client performance-based fees inconsistent with Section 205(a)(1) of the Investment Advisers Act of 1940.

Omitting Rebates and Applying Discounts Incorrectly

OCIE staff found instances of advisers failing to apply certain discounts or rebates to advisory fees charged to clients, as specified in the advisory agreements. For example, OCIE staff observed advisers that (i) failed to aggregate client account values for members of the same household for fee-billing purposes; (ii) failed to reduce a client’s fee rate when the value of the client’s account reached an agreed upon breakpoint level; or (iii) charged a client of a wrap fee program additional fees, such as brokerage fees, when such costs were included in the bundled fee.

Disclosure Issues Involving Advisory Fees

OCIE staff observed a number of issues with respect to advisers’ disclosure of fees or billing practices. For example, OCIE staff observed advisers that (i) disclosed a maximum advisory fee rate but had an agreement with a client to charge a higher rate; or (ii) failed to disclose certain additional fees and markups, such as compensation earned by the adviser on certain asset purchases or that the adviser had fee sharing arrangements with affiliates.

Adviser Expense Misallocations

OCIE staff noted instances of advisers to private and registered funds that misallocated expenses to the funds. For example, advisers were found to have allocated distribution and marketing expenses, regulatory filing fees and travel expenses to the funds instead of to the adviser in contravention of applicable advisory agreements, operating agreements or disclosures.

In response to the deficiencies identified by OCIE staff, some advisers have changed their practices, enhanced policies and procedures and reimbursed clients for overbilled fees and expenses. OCIE staff noted that other advisers proactively reimbursed clients for incorrectly billed fees and expenses identified through periodic internal testing of billing practices.

S&K Observations

In light of the issues identified in the Risk Alert, advisers should assess the accuracy of disclosures and adequacy of policies and procedures regarding advisory fee billing and expenses. As a matter of best practice, advisers should implement periodic forensic reviews of billing practices to identify and correct issues relating to fee billing and expenses.


If you have any questions regarding the matters covered in this memo, please contact any of the partners and counsel listed below or your primary attorney in Seward & Kissel’s Investment Management Group.

Seward & Kissel Regulatory Compliance (SKRC) offers comprehensive compliance consulting services. Please contact any of the attorneys listed below to learn more about SKRC.