Advisory fees

SEC Releases Observations from Examinations Relating to Advisory Fees

November 30, 2021 | Charlie Jarrett

The Division of Examinations of the Securities and Exchange Commission (SEC) recently released a Risk Alert relating to the Advisory Fee Initiative titled “Division of Examinations Observations: Investment Advisers’ Fee Calculations.” Under this Initiative, the SEC conducted approximately 130 examinations of SEC-registered investment advisers focusing on how advisory fees are disclosed and charged, particularly to retail clients.

Since 2018, the SEC has included the disclosure of the costs of investing in its list of yearly exam priorities. The Division of Examinations has focused on whether advisers have adopted policies and procedures reasonably designed to produce fair and accurate fee assessments, and whether those fees are disclosed to clients in a manner such that clients understand the costs of the advisory services provided.

During the Initiative, the Division’s review included: (1) the accuracy of the fees charged by the examined advisers; (2) the accuracy and adequacy of the examined advisers’ disclosures; and (3) the effectiveness of the examined advisers’ compliance programs.

SEC Multi-Branch Initiative Results in Branch Office Risk Alert

January 5, 2021 | Steve Parker

Late last year, the SEC’s Office of Compliance Inspections and Examinations (OCIE), now known as the Division of Examinations, issued a compliance risk alert warning investment advisers to ensure that their compliance programs are uniform and are uniformly applied across all branch office locations.

The alert summarized the findings from OCIE’s two-year Multi-Branch Initiative, in which it examined nearly 40 advisers’ main offices and their respective branches. Most of the advisers included in the initiative had 10 or more branches that were widely dispersed from the main office. Primarily, the report emphasized that compliance risks relating to supervising personnel and processes are heightened when the branch office has policies or procedures that differ from those of the main office.

In the report, OCIE further explains that more than half of the examined firms had policies and procedures that were either inaccurate or not consistently applied among branches, or both. Almost all firms had at least one compliance defect. Many of the deficiencies related to unrecognized custody of client funds, inadequate or inconsistent fee billing practices, failure to recognize and disclose conflicts of interests, or differences in portfolio management practices or other ways in which the firm’s advisers formulate or deliver investment advice.

SEC Charges Investment Adviser for Overbilling Clients to Pay Personal Expenses

July 10, 2017 | Elizabeth Dalziel

On May 30, 2017, the United States District Court for the Eastern District of New York entered a final consent judgment against Marc D. Broidy (“Broidy”) and his investment advisory firm, Broidy Wealth Advisors, LLC (“BWA”). The Securities and Exchange Commission (“SEC”) had filed a complaint alleging that Broidy and BWA “intentionally overbilled clients and used the excess fees to pay for, among other things, Broidy’s personal expenses.” The complaint also alleged that Broidy converted assets from clients’ trusts, also for the purpose of paying personal expenses.

The SEC alleged that from about February 2011 to February 2016, Broidy and BWA overbilled approximately $643,000 in connection with advisory services to five clients. The SEC also alleged that Broidy and BWA made conscious efforts to conceal the overbilling. BWA’s Form ADV and Investment Advisory Contracts stated that clients would typically be billed anywhere from 1 percent to 1.5 percent of their assets under management on a quarterly basis. However, Broidy and BWA charged clients significantly more than these percentages. Continue reading ›

SEC Targets NY-Based RIA for Failure to Disclose Conflicts of Interest

January 6, 2016 | Patricia Klusmeyer

Investment advisers continue to get into regulatory trouble when it comes to failing to disclose conflicts of interest and related party transactions as required by both federal and state investment adviser law. Recently, the Securities and Exchange Commission (SEC) initiated proceedings against Fenway Partners, a New York-based registered investment adviser which served as adviser to three private equity funds. The conflicts arose around two related entities: Fenway Partners Capital Fund III, L.P., an affiliated fund, and Fenway Consulting Partners, an affiliate largely owned by the executives and owners of Fenway Partners.

Fenway Partners and Fenway Consulting Partners were both owned and managed in large part by respondents Peter Lamm, William Smart, Timothy Mayhew, and Walter Wiacek. The fund in question, Fund III, was operated by an Advisory Board consisting of independent limited partner representatives, pursuant to its organizational documents. According to the SEC allegations, the respondents failed to disclose several conflicts of interest and related party transactions to both the Advisory Board of Fund III and their fund investors.
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Texas Securities Board Approves Advisory Payments to Retiring Advisers

December 28, 2015 | Steve Parker

In a letter dated December 11, 2015, the Texas State Securities Board (“Board”) granted a no-action request by Managed Financial Service Corporation, Inc. (“MFSC”) that paves the way for a retiring investment adviser representative to receive continuing compensation after retirement. The Board confirmed that it would not commence or seek enforcement proceedings against either MFSC or a specified retiring investment adviser representative if certain procedures were followed. MFSC and its retiring representative requested the no-action letter in order to implement a plan under which the retiring representative would continue to receive compensation derived from the residual value of the work as an investment adviser for certain accounts.

The no-action was requested based on a concern, predominant in the investment adviser industry, that receipt by a retired adviser representative of ongoing advisory fees or a portion of advisory fees received by a successor adviser or firm would subject the retired representative to discipline for conducting business without registration.

The no-action relief granted by the Board is similar to the practice in the brokerage industry that has been codified in FINRA Rule 2040 (b) in which, prior to that date, was sanctioned by a FINRA no-action letter issued to Merrill Lynch in March 2012.
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Custody Rule for States Proposed by NASAA

April 19, 2011 | Steve Parker

The North American Securities Administrators Association (NASAA) today published for comment a proposed custody rule for investment advisers. The proposed rule modifies the account statement detail requirement in subsection (b)(4)(A) of a proposed rule previously issued by NASAA relating to the same subject.

Comments to the previous proposed rule focused on the requirement that an investment adviser to private funds provide detailed quarterly statements to all clients. In response to these overwhelming comments, NASAA modified subsection (b)(4)(A) to reduce the level of detail to be contained in the quarterly statements that are to be sent to investment fund participants. Under the new proposed rule, the quarterly statements need only contain the quarter-end holdings and transactions during the quarter.

The basic structure of the proposed custody rule is consistent with prior model custody rules proposed by NASAA pursuant to Uniform Securities Acts of 1956 and 2002 and adopted by many states. More specifically, it provides for a number of safekeeping requirements including, among other things, providing notice to the state’s securities administrator, employing a qualified custodian, and giving certain notices to clients. In particular, the NASAA proposed rule requires any investment adviser who sends a statement to a client to urge the client to compare the account statements received from a qualified custodian with those received from the investment adviser. Any adviser who has a reasonable basis for believing that the qualified custodian sent account statements to the investors directly need not provide a separate account statement.
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