securities attorneys
SECURITIES, CORPORATE, & BUSINESS ATTORNEYS

publications

Law at the Speed of Business

Investment Adviser (RIA) Compliance: Valuation, Disclosure, Expenses, and Substantive Review.

VALUATION, DISCLOSURE, EXPENSE ALLOCATION, & SUBSTANTIVE REVIEW.

Valuation

OCIE noted a number of frequent deficiencies in advisers’ valuation of client assets, often resulting in inflated advisory fees. Specifically, OCIE cites two common types of valuation deficiencies:

  • Advisers using a metric that differs from that which was disclosed (e.g., valuing an illiquid asset at cost rather than at fair market value); and
  • Advisers valuing assets using a process other than that which was disclosed (e.g., using market value at the end of a cycle rather than using an average daily balance).

Disclosure

The Risk Alert identifies issues related to inconsistencies between advisory fee billing practices and disclosures made in the adviser’s Form ADV, as well as failures to disclose additional fees, fee-sharing arrangements or other sources of compensation. Specifically, OCIE notes instances where advisers did not disclose:

  • Fee-sharing arrangements with affiliates;
  • Compensation on asset purchases; and
  • Collection of brokerage expenses exceeding the cost for those services.

Expense Allocations

The Risk Alert reiterates the importance of allocating expenses to clients in accordance with applicable disclosure documents and, in particular, notes misallocations of:

  • Marketing expenses;
  • Regulatory filing fees; and
  • Travel expenses incurred by advisory personnel.

Substantive Review

OCIE is also focused on mistakes in the financial calculation process. The Risk Alert highlighted examples of mistaken implementation and poor internal controls that can lead to improper charges to client accounts, including:

  • Improper billing frequency;
  • Failing to apply fee rebates and discounts; and
  • Applying incorrect fee rates.

 

VOLUME VII, ISSUE 2 OF THE OFFICE OF COMPLIANCE INSPECTIONS AND EXAMINATIONS ALERT MAY BE FOUND AT: https://www.sec.gov/files/ocie-risk-alert-advisory-fee-expense-compliance.pdf