On April 12, 2018, the US Securities and Exchange Commission (SEC) Office of Compliance Inspections and Examinations (“OCIE”) released an alert highlighting the most frequent fee and expense compliance issues identified during investment adviser examinations.1 While these identified deficiencies do not necessarily constitute violations of law or regulation, they reflect breakdowns of operating controls that could lead to inadvertent breaches of fiduciary duty. The alert, coupled with other recent SEC actions, provides critical insight into regulatory focus areas and expectations regarding advisory programs. As discussed in Deloitte’s2 recent white paper, The Rewards and Risks of Managed Account Programs, advisory accounts are an ever-increasing area of focus for regulators as growth continues to accelerate across the industry, surpassing $6T in total assets in Investment Advisory solutions at the end of 2017.3 Firms should carefully consider the OCIE alert and explore the tools and services available to support advisory program compliance while prioritizing, planning, and executing their risk management efforts.
Failure to adhere to the terms of client agreements and representations, including the disclosures provided in Form ADV, can often lead to violations of the Investment Advisers Act of 1940 (“Advisers Act”).4 In the alert, the SEC listed six compliance issues relating to fees and expenses charged to clients that were the most frequently identified in deficiency letters sent to advisers:
1. Fee-Billing based on incorrect account valuations
2. Billing fees in advance or with improper frequency
3. Applying incorrect fee rate
4. Omitting rebates and applying discounts incorrectly
5. Disclosure issues involving advisory fees
6. Adviser expense misallocations
Recent SEC actions highlight the potentially severe financial implications that can arise from compliance issues stemming from the examples laid out above. During their fiscal years 2016 and 2017, the SEC imposed over $400 million in penalties at least partially attributable to advisory program activities; among those penalties was over $100 million directly related to fee and expense compliance failures.5
What can advisers do?
The six compliance issues laid out in the SEC alert, map closely to certain risk areas and associated risk mitigation steps previously laid out in The Rewards and Risks of Managed Account Programs white paper:
Say what you do and do what you say
Measure twice and bill once
Deloitte believes that advisory program assets will likely surpass $9.6T by 20206, serving as a core engine for growth at wealth management firms and providing a powerful antidote to the disruption facing the industry. However, firms will likely only be able to fully realize the advisory program opportunity if they rigorously manage the many risks these programs present.
As a trusted advisor to the wealth and investment management industry, Deloitte provides tailored solutions to enable the critical area of risk management associated with advisory programs, including specific solutions designed to mitigate risks associated with account billing, including:
For further information, please contact one of our wealth management practice professionals listed below:
1US Securities and Exchange Commission National Exam Program, Office of Compliance Inspections and Examinations, Risk Alert Volume VII Issue 2, https://www.sec.gov/ocie/announcement/ocie-risk-alert-advisory-fee-expense-compliance.pdf
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