Kelley A. Howes, Susan I. Gault-Brown, and Ken W. Muller
Banking + Financial Services, Broker-Dealer Compliance + Regulation, Capital Markets, Financial Institutions + Financial Services, Financial Services, Corporate, Financial Technology, Investment Management, and Private Equity Funds
The SEC’s Office of Compliance Inspections and Examinations (OCIE) this week provided investment advisers with a summary of frequent compliance issues related to advisory fees and expenses that the staff is seeing in their examinations of registered investment advisers.
The Risk Alert, published April 12, 2018, is the latest in a series of similar alerts published by OCIE to educate advisers and other market participants regarding consistent risk themes it identifies in its examination program and to promote compliance. OCIE said that its objective in publishing this Risk Alert is to “encourage advisers to assess their advisory fee and expense practices and related disclosures to ensure that they are complying with the [Investment] Advisers Act, the relevant rules, and their fiduciary duty, and review the adequacy and effectiveness of their compliance programs.” The Risk Alert summarizes deficiencies identified in more than 1,500 examinations completed during the past two years.
OCIE said that the terms of an agreement under which an adviser provides advisory services to its clients and the disclosure of fee and expense policies in Part 2A of Form ADV represent critical information upon which clients rely to make informed decisions, including about whether to engage or retain an adviser. Accordingly, an adviser that does not adhere to the terms of these agreements and disclosures, “or [who] otherwise engages in inappropriate fee billing and expense practices,” may be subject to enforcement action under the Investment Advisers Act.
The most frequent deficiencies OCIE identified include:
OCIE has stated that its Risk Alerts are designed to promote compliance by educating advisers about consistent issues its staff sees during its examination program. In other words, Risk Alerts provide advisers with the opportunity to proactively address such issues if they are present in their own shops.
Advisers should take the time to carefully evaluate their advisory agreements, Form ADV disclosure, and compliance policies and procedures to determine whether any of the identified risks are present and consider changing compliance and operational policies and procedures or proactively reimbursing clients by the amount of any overbilled advisory fees and expenses. These steps would likely mitigate the possibility that an adviser would receive a deficiency related to failure to comply with or adequately disclose its fee and expense policies in an OCIE exam. Conversely, advisers that ignore this opportunity are more likely to be the recipients of significant deficiencies or possible enforcement referrals.
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