The Securities and Exchange Commission says it has found pervasive problems with how registered investment advisor firms charge advisory fees.
The firm’s Division of Examination conducted around 130 exams of RIA firm, focusing on advisory fees and primarily those charged to clients, and it “identified deficiencies related to the advisory fees charged during most of these examinations,” the SEC said in a risk alert published on Wednesday.
The examiners found two main areas of concern: fee calculation errors, such as over-billing, inaccurate calculations of tiered or breakpoint fees, and inaccurate calculations arising from incorrect householding of account; and failure to credit certain fees the clients are owed, such as prepaid fees for closed accounts or pro-rated fees for onboarding clients.
Examiners found instances of advisors charging fees that were different from those that were contractually agreed to, using incorrect fee schedules and making errors in calculating fee percentages manually entered into their systems, the SEC says.
The regulator’s staff also found examples of double-billing, incorrect account valuation, inconsistent refunding of unearned fees and RIA firms requiring clients to submit written requests for refunds of unearned fees, according to the regulator.
Several of the RIA firms in the exam sweep also had disclosure deficiencies related to fees, such as not reflecting their current fees in their Form ADV Part 2 brochures, failing to outline a variety of other fee-related topics or the fees themselves, and failing to accurately describe how the fees are calculated and billed, as well as errors in disclosing the timing of the fee billing, the SEC says.
The examiners also found instances of inadequate or missing policies and procedures in regard to fee calculation and billing and inaccurate financial statements, according to the risk alert.
The SEC warned that “inappropriate” practices related to fee billing and expense may constitute a violation of RIA firms’ fiduciary duty and the antifraud provisions of the Advisors Act. To avoid such a violation, the regulator recommended that RIA firms “review routinely, refine, and improve, as appropriate, their fee billing policies, procedures, and practices and address new risks as they are identified,” as well as review their disclosures.
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