June 27, 2022

DOL Fiduciary Rule Timeline and Requirements

 

DOL Fiduciary Rule

Timeline & Requirements


The Department of Labor (“DOL”) adopted Prohibited Transaction Exemption 2020-02 (“PTE 2020-02”) on February 16, 2021, and included a non-enforcement period until February 1, 2022. PTE 2020-02 is called Improving Investment Advice for Workers and Retirees and expands the definition of advice covered under ERISA law to include recommendations about retirement plan rollovers and Individual Retirement Accounts (“IRAs”). Therefore, many advisors that once did not offer retirement plan advisory services are now subject to the ERISA fiduciary standard. Compliance with these standards are separated into two enforcement dates; February 1, 2022 and July 1, 2022. These requirements and standards are outlined below.

What Investment Advice is Covered Under PTE 2020-02? Investment advice to take a distribution from an ERISA sponsored plan or to roll over the assets to an Individual Retirement Accounts (“IRAs”), or investment advice regarding other similar transactions including rollovers from one ERISA Plan to another, one IRA to another IRA, or from one type of account to another account.

FEBRUARY 1, 2022 - ACTION REQUIRED: 

All advisors that provide investment advice covered under PTE 2020-02 are required to comply with the following effective February 1, 2022.

1. Written Acknowledgment of Fiduciary Status and Disclosure of Conflicts: Advisors are required to ensure clients are provided with a written acknowledgment of their fiduciary status and disclosure of the material conflicts of interest when providing investment advice to accounts covered under PTE 2020-02 (as defined above).

PLEASE NOTE: AdvisorAssist has created a one-page ERISA Fiduciary Disclosure and Acknowledgement Form to provide adequate disclosure to clients. Please contact us for additional information.

2. Implementation of Policies and Procedures: Advisors who provide transactional investment advice to accounts covered under PTE 2020-02 are required to adopt policies and procedures to mitigate or eliminate conflicts. 

PLEASE NOTE:  AdvisorAssist has developed PTE 2020-02 Policies and Procedures for advisors to implement immediately which can be made available upon request.

3. Annual Reporting and Certification of Compliance: On an at least annual basis, advisors must conduct a retrospective review that is reasonably designed to assist the firm in detecting and preventing violations of and achieving compliance with the impartial conduct standards.

PLEASE NOTE: AdvisorAssist has created a Rollover Log within AdvisorCloud360®, our proprietary compliance technology, to help capture the necessary information and aid in the annual reporting and review process

JULY 1, 2022 - ACTION REQUIRED: 
While we recommend that you implement the full scope of the rule as soon as possible, all advisors that provide investment advice covered under PTE 2020-02 are required to comply with the following effective July 1, 2022. 

1. Due Diligence Disclosure and Documentation: Advisors are required to conduct due diligence and retain written documentation of the specific reasons that any recommendation to roll over assets (whether from an ERISA plan to an IRA, from one IRA to another IRA, or from one type of account to another (e.g. commission-based account to fee-based account) is in the best interest of the client.

PLEASE NOTE:  AdvisorAssist has created a PTE 2020-02 Due Diligence and Checklist that is available upon request.


May 3, 2022

SEC Issues Risk Alert on MNPI and Code of Ethics Compliance Issues

 SEC Issues Risk Alert on MNPI and Code of Ethics Compliance Issues


On April 26, 2022, the Securities Exchange and Commission (“SEC”) Division of Examinations (“the Division”) released a risk alert pertaining to notable deficiencies the staff observed related to Section 204A of the Investments Advisers Act of 1940 (the “Advisers Act”). Specifically, the deficiencies noted were related to Rule 204A-1 (the “Code of Ethics Rule”) regarding investments advisers' written policies and procedures concerning material non-public information (“MNPI”). The cited deficiencies were identified across numerous examinations of investment advisers nationally. In the alert, the Division noted that deficiencies related to the Code of Ethics Rule have been some of the most commonly noted deficiencies in exams. 


Given the broad nature of advisory business, investment advisers are required under the Advisers Act to maintain and enforce written policies and procedures that are reasonably designed to account for numerous conflicts of interest and regulatory requirements. Among those, investment advisers are expected to have policies and procedures in place to account for and prevent the misuse of MNPI. 


Below are some of the examples provide by the Division where investment advisers fell short of meeting their obligations to maintain appropriate policies and procedures under Rule 204A:


Alternative Data: Alternative data refers to many different types of information that is becoming increasingly more common in financial analysis. Some examples include drone footage of retailer parking lots, social media and internet search data, and geolocation data from consumer mobile phones. While utilizing alternative data does not necessarily mean that one would be in receipt of MNPI, the fact is it very well could be. The Division noted that in exams where investment advisers were utilizing alternative data gathering there were three common concerns:


  • Very little in the way of formalizing a process for access persons to adhere to in terms of performing due diligence on the alternative data sources. 

  • Very little to nothing in place from a policies and procedures standpoint regarding the assessment of the various terms, conditions and any legal obligations related to the collection or dissemination of alternative data.

  • Lack of consistency in adhering to written policies and procedures


Value Add Investors: This refers to clients or investors that are corporate executives or professional financial investors. By and large, the noted deficiencies were either a lack of policies and procedures regarding MNPI risks or a lack of awareness and process on identifying and tracking relationships that were potential sources of MNPI.


Expert Networks: Similar to Value Add Investors, the lack of adequately implemented policies and procedures concerning MNPI as it relates to the use of and relationships with industry professionals that provide specialized information and research services was the key finding


On a more granular level, the Division noted more specific deficiencies as it relates to the Code of Ethics Rule 204A-1:


Identification of Access Persons: The Division noted in their findings that investment advisers had not properly identified nor supervised certain employees as access persons, with compliance policies and procedures documents either not defining or inaccurately defining an access person.


Initial Public Offerings (“IPO”) and Limited Offerings: Another common deficiency identified was related to access persons purchasing a beneficial interest in an IPO or Limited Offering without the requisite pre-approval to do so. The Code of Ethics Rule requires pre-approval for any adviser access person to obtain prior approval from the firm's Chief Compliance Officer (“CCO”) before acquiring any interest in an IPO or limited offering. Often in the exams noted, there was no mention of this requirement in the Adviser Code of Ethics.


Personal Securities Transaction and Holdings: Access persons of an investment adviser are required to disclose and provide annual holdings reports for all investment accounts in which they hold a direct or indirect beneficial interest in. Additionally, the CCO must review these accounts and their transaction report to ensure compliance with any internal policies and procedures that would limit what an access person could acquire an interest in. The Division noted the following deficiencies regarding personal securities transactions and holdings:


  • Advisers could not produce evidence of supervisory review of holdings and transaction reports.

  • The CCO was allowed to self-review their holdings and transaction report instead of delegating that responsibility.

  • A complete lack of reports being submitted by access persons of their holdings/transactions

    • In some instances, the adviser’s code of ethics did not include any language requiring this of their access persons

  • The full scope of what is required to be reported (i.e., including private placements) was not outlined in the advisers code of ethics and, therefore, these holdings were not disclosed or reviewed.


Amendments: Lastly, the Division noted instances where supervised persons were either not provided a written copy of the adviser’s code of ethics or they, the supervised person(s), provided no written acknowledgment of their receipt and understanding of their duties and responsibilities under the advisers code of ethics. Specifically, this was the case in instances where amendments were made and finalized to the advisers code of ethics. 


It is critical that all access and supervised persons of any investment adviser are aware of what is both expected and required of them as employees of the adviser. This is specifically why the Code of Ethics rule exists. However, it is the responsibility of the CCO to ensure that their firm’s policies and procedures are as thorough and involved as they need to be to meet the various complexities that may exist. As it relates to MNPI and what you can do to ensure you are meeting what is expected of you, we encourage you to review your client files, make sure you are aware of any clients that are executives of publicly traded companies are noted and that you consider implementing a restricted securities list to account for instances where intentional or inadvertent receipt of MNPI is not acted upon. Also, review your current code of ethics with an eye paid towards what has been noted by the Division. And lastly, as the age-old adage says, if you say you are doing something…do it. The Division will consistently be looking to ensure that advisers are adhering to what their stated policies and procedures are saying they do. 


For more information from the Division, you can read the full release here


April 11, 2022

Division of Examinations - 2022 Examination Priorities

     


Division of Examinations 2022 Examination Priorities


Each year, the U.S. Securities and Exchange Commission’s (“SEC’s”) Division of Examinations (the “Division”) publishes its examination priorities for the upcoming year. These priorities are designed to enhance the transparency of the Division’s examination program and to provide insight into their risk-based approach. The Division conducts examinations in order to promote compliance and ensure market integrity for investors. In 2021, the Division conducted approximately 3,040 examinations of registered investment advisors and approximately 70% resulted in at least one or more written deficiencies. Over the course of the past twelve months, we’ve witnessed significant proposals and rule changes to the Investment Advisers Act of 1940 (“Advisers Act”) and other regulations that impact registered investment advisers. Most notably, the SEC recently proposed two additional rules and regulations, including a Private Fund Compliance and Cybersecurity Rule. Both rules are currently in a sixty (60) day comment period. While these rules likely won’t go into effect until 2023, they aid in supplementing the Division’s regulatory priorities for 2022. While the priorities outlined below are critical, this list of priorities is not comprehensive and remains flexible as these will not be the only areas or issues the Division addresses in examinations. STANDARDS OF CONDUCT: FIDUCIARY DUTY, AND FORM CRS The Division will continue to ensure both duty of care and duty of loyalty in the decision-making of investment advisors. In particular, examiners will review the advisor’s ability to uphold their fiduciary duty to clients through their efforts to fulfill best execution obligations as well as efforts to mitigate the potential for financial conflicts. Policies and procedures surrounding revenue-sharing arrangements, mutual fund share class selection, the recommendation of wrap fee programs, and the recommendation of higher-cost proprietary investment products should demonstrate impartial fiduciary advice and be supported by the appropriate level of due diligence. Furthermore, the Division will continue to narrow its focus on advisors with dual registration and/or affiliated firms as compensation structures and cost considerations create the potential for incentives to act on behalf of the firm rather than the client. Lastly, the Division will look to confirm that disclosures are in place that allows the client to provide informed consent to their relationship with the advisor. Clients must understand the risks and costs of investing prior to signing any agreements and subjecting their assets to the decisions of a money manager. From a transparency standpoint, the Form CRS is crucial for SEC-registered firms in communicating practices, services, and fees to the presumably uneducated retail investor. INFORMATION SECURITY AND OPERATIONAL RESILIENCY As the markets and investment advisory space grow more and more complex, so too is the potential for cyber-related fraud and intrusions, regardless of the sophistication and/or size of the advisor. Examinations will focus on, among other things, the protection of client's personal financial information through identity verification controls to prevent unauthorized access, oversight of vendors and third-party service providers, approaches to addressing malicious email activity such as phishing attempts, procedures in place that safeguard against ransomware attacks, operational risks and vulnerabilities concerned with a dispersed work-from-home environment, and compliance with Regulations S-P and S-ID. A key component of an effective business continuity and data integrity plan is operational resiliency, which has never been more apparent as advisors continue to address pandemic-related change. As a result, the Division will continue to focus on the impact of climate risk and substantial disruptions to normal business operations along with assessing an advisor’s ability to anticipate, prepare for, respond to, and adapt to both sudden disruptions and incremental changes stemming from climate-related situations. In addition to the Division’s priority on information security and operational resiliency, the SEC recently proposed new regulations that would require advisors to adopt written policies and procedures that address cybersecurity risks that face the firm as well as enhance reporting and recordkeeping as it pertains to cybersecurity threats and incidents. The rule proposal and continued focus area come on the heels of the Division’s continued cybersecurity examination initiatives. ENVIRONMENTAL, SOCIAL, AND GOVERNANCE INVESTING The Division has also identified Environmental, Social, and Governance (“ESG”) as an area of focus for 2022. In recent years, these strategies have become increasingly popular in the investment industry as a product offering, investment strategy, and screening/analysis method. With no standardized ESG regulations and guidelines currently put in place by the SEC, it is important for advisors to have established frameworks around how they approach ESG as the Division will be scrutinizing disclosures by advisors that advertise or claim to incorporate ESG strategies/criteria, to ensure there is no materially false and misleading statements or omissions. Examinations will also have a continued focus on whether advisors are (i) adopting and implementing policies, procedures, and practices aimed to prevent violations of securities laws as it pertains to their ESG-related disclosures, (ii) voting Client proxies in accordance with policies and procedures and whether this is contradictory to an RIA’s ESG-related disclosures and policies, and (iii) misrepresenting or overstating their ESG incorporation into the investment process. PRIVATE FUNDS The Division noted that over 35% of advisors manage more than 18 trillion private fund assets deployed in a variety of investment strategies in various fund types, including hedge funds, private equity funds, and real estate funds. This number is likely to continue to grow as advisors look for different ways to expand their service offerings and distinguish themselves. Given the continued growth in the private fund market, the Division will review advisors managing funds to ensure they are meeting their fiduciary duty under the Investment Advisers Act of 1940 (“Advisers Act”), and will assess risks, including a focus on compliance programs, fees and expenses, custody, fund audits, valuation procedures, conflicts of interest, disclosures of investment risks, liquidity issues or limitations, and controls around material nonpublic information (“MNPI”). In addition to the Division’s focus on private funds, the SEC has also voted to propose new rules and enhancements to improve the regulation of private fund advisors. The proposed rules focus on enhanced disclosure to investors and would mandate a quarterly statement be sent to clients, detailing the fees, expenses, and performance of the fund. These changes would also address reporting and documentation, with proposed increases to the documentation of fund audits, books and records, and advisor-led secondary transactions. These efforts, paired with measures to increase accountability among private fund advisors, aim to protect investors and establish stronger regulations in the private fund space. EMERGING TECHNOLOGIES AND CRYPTO-ASSETS The SEC sees the advancements in the financial technology (“FINTECH”) space moving at a rapid pace. As such, in order to stay abreast with the developments and advancements, examinations will focus on advisors offering new and emerging products and services, such as crypto-assets, automated digital investment advice (robo-advisers), fractional shares, social media influencers, or any other digital engagement tool In addition to the aforementioned regulatory priorities, the Division will continue to prioritize examinations over advisors that have never been examined, including recently registered firms, and those that have not been examined for a number of years. To read the full report, click here: 2022 SEC Examination Priorities.

December 20, 2021

SEC Releases a Statement Regarding Form CRS Disclosures

    


SEC Releases a Staff Statement Regarding Form CRS Disclosures


On December 17, 2021, The Securities and Exchange Commission (“SEC”) released a Staff Statement Regarding Form CRS Disclosures. The purpose of form CRS is to provide transparency in order for retail investors to make informed decisions in regards to their relationship with a broker-dealer, investment advisor, or a combination of both. This relationship summary must use plain English to answer the specific topics in a given order including unified headings.This form is required to be delivered to every new and potential retail client and be posted with easy access on the firm's public website if applicable. 

A wide range of filed relationship summaries were reviewed by The Standards of Conduct Implementation Committee (the “Committee'') and this release describes what firms are doing well in their relationship summaries, as well as areas that can be improved upon. The common deficiencies addressed by the Committee are described below:
  • Use of Technical Language - Some firms included legal jargon and highly technical business terms such as; riskless principal, markups, and citing SEC rules without clear explanations are not permitted. No additional disclosures should be included besides the ones permitted and required. 
  • Omission of Required Information - Many advisors were found to be omitting required disclosures such as headers, prescribed language, or conversation starters related to conflicts of interest, investment authority, monitoring services, and disciplinary history.  
  • Reliance on Proposed, Rather than Final Instructions - The Committee also noted that many advisors failed to include the required information, modified prescribed language, or failed to follow the prescribed order of formatting. It is important to note that when creating a relationship summary the final instructions to Form CRS should be used. 
  • Lack of Specific References to More Detailed Information - Numerous reviewed summaries did not include hyperlinks or provide instructions on where more detailed information could be found. These findings are in reference to Form ADV PArt 2A, Regulation Best Interest, as well as fee information.
  • Shortcomings in Descriptions of Relationships and Services; Fees, Conflicts, and Standard of Conduct 
    • Monitoring - Various relationship summaries reviewed failed to describe the evaluation frequency of client investments and whether or not the firm has any material limitations on its monitoring services. 
    • Investment Authority - The description of the firm’s investment authority including who makes the investment decisions, specifically the purchase or sale of investments in the types of accounts were not included. For firms that partake in both discretionary and non-discretionary authority the services offered to each authority were not accurately defined.
    • Limited Investment Offerings - Many advisors failed to include if the firm has any product limitations and a description of such as required by the SEC.
    • Principal Fees and Costs - Some relationship summaries failed to include detailed descriptions of principal fees and costs as well as how they are assessed and billed. In the same regard, associated conflicts of interest or incentives were not defined as well.
    • Wrap Fee Program Offerings and Fees - Some firms’ relationship summaries did not accurately reflect the fees and costs nor did they state the services included as part of the wrap program. The Committee also suggests that firms should explain how wrap fee program fees are higher than asset-based advisory fees because wrap fees include most transaction costs and fees to a broker-dealer or bank that has custody of these assets. 
  • Extraneous Disclosures Regarding Standards of Conduct - Multiple firms used terms such as fiduciaries or fiduciary duty rather than using the prescribed language in Item 3 of the form.
  • Firm and Financial Professional Compensation Arrangements and Conflicts of Interests - Various relationship summaries explained how the firm mitigates risk rather than specifically explaining the incentives created by a certain conflict of interest and when they would exist. 
  • Modification and/or Supplementation of the Disciplinary History Disclosure - Many relationship summaries omitted or modified the heading of the Disciplinary History section and added more context to their answer rather than the only permitted answers, “yes” or “no.” It is also important to note that some firms removed this section or left it blank which is not permitted.
  • Issues with Prominently Displaying Relationship Summary on Firm Website - Some firms failed to display their relationship summary on their webpage or made it difficult for the client to access and locate it on their website. Other specific difficulties addressed included the use of small or hard-to-read text in the hyperlink, non-descriptive terms or phrases to label the summary, not placing the hyperlink on the homepage, and placing the link on the disclosures page. 
  • Issues with Description of Affiliate Relationships - Many affiliated firms declined to state what services or investment products discussed are related to which firm. They also did not make it clear as to what disclosures apply to a particular firm or both. In other instances, multiple affiliated entities were listed but failed to describe the relationship between the firm and the entities. While the preparation of separate relationship summaries is permitted some firms who partook in this action did not provide a way of obtaining the summaries of their affiliates.
  • Poor Design - Various firms did not use the required text features, made poor use of white space and interactive features such as graphs and tables.
  • Use of Marketing Language - Some relationship summaries included marketing language or used superlative descriptors which are not permitted. Specifically, the Committee noted the use of the language, “being held to the highest possible legal standard” is not permitted.
  • Boilerplate - Words such as “may '' in relation to a firm's conflicts were seen to be used which defeats the purpose of transparency. Many firms that used widely shared templates did not make the appropriate modifications needed to relate to their specific firm.
Best Practices

The main goal of a relationship summary is to make it easy for retail investors to read and comprehend the important information of a firm in order to make an informed decision with full and fair disclosure. It is important to put your clients' and potential clients' needs before your own in all aspects of the relationship and we can apply this to the relationship summaries as well. We suggest reviewing your firm's relationship summaries to ensure that they are up to the standards of the Committee. When conducting this review use the final instructions to Form CRS as a reference. Remember, that the only permissible disclosures are listed in the final instructions as well and the addition of others is not permitted. It is important to remove any words such as “may'' or marketing language as this may prevent the retail client from being able to evaluate the firms’ services. Lastly, ensure that your firm’s relationship summary clearly identifies conflicts and how these conflicts are relevant to the retail client. 

AdvisorAssist, LLC can provide your firm with actionable advice and filing of Form CRS to prevent your firm from facing any of these deficiencies defined above. Contact us at 617-800-0388 with any questions you may have.

November 13, 2021

SEC Issues Risk Alert on Robo-Advisors

   


SEC Issues Risk Alert on Robo-Advisors

On November 9, 2021, the U.S. Securities and Exchange Commission (“SEC”) developed a risk alert in relation to compliance failures observed when providing electronic investment advice to clients. The risk alert was a result of concluding a national initiative where the Division of Examinations (the “Division”) conducted audits of SEC-registered investment advisers who provide electronic investment advice (“Robo-Advisors”). Robo-Advisors can offer impactful benefits including accessible and lower-cost services for investors. However, when Robo-Advisors fail to comply with regulatory obligations, the investors may be at risk. 


The Division conducted a series of examinations to assess the practices of advisors providing Robo-Advisory services, focusing on their compliance programs, formulation of investment advice, marketing, and advertising practices, data protection practices, and registration information. Nearly all advisors examined received deficiency letters. Common deficiencies included: 


  • Compliance Programs - Most advisors had inadequate compliance programs, lacked written policies and procedures, or had unimplemented or untested programs. 


  • Portfolio Management - Many advisors were found to not be testing the investment advice generated by their platforms, jeopardizing their fiduciary obligation to the duty of care. Advisors were also found to have inaccurate or incomplete disclosures in many Form ADV filings. 


  • Performance Advertising and Marketing - More than half the advisors examined had misleading or prohibited statements on their websites, materially misleading performance advertisements, and inadequate disclosures about “human” services in their advertising and marketing material. 


  • Cybersecurity and Protection of Client Information - Few advisors were found to have policies/procedures that addressed protecting the firm’s systems. In addition to lacking written policies and procedures, few advisors were found to have tested the system's emergency responses as well.  


  • Registration matters - Many advisors were found to be relying on the Internet adviser exemption but were ineligible to do so. SEC rule 203A-2(e) of the Investment Advisers Act of 1940 creates an eligibility to operate as a registered investment advisor under the Internet Advisor Exemption, provided the elements of that rule are met.  The elements of that rule include the following:


  • Provides investment advice to advisory clients through an interactive website. An interactive website means a site in which computer software-based models or applications provide investment advice based on personal information each client submits through the website.

  • Provides advice to all of its clients exclusively through the interactive website;

  • Maintains documentation demonstrating that it provides investment advice to clients exclusively through an interactive website.


Best Practices


The Staff recommended the following to improve compliance:


  • Adopt, implement, and follow written policies and procedures that are tailored to the advisor’s practice. Paying special attention to portfolio management, custody, and books and records. 


  • Test algorithms periodically to ensure they are operating correctly. 


  • Safeguard algorithms. Employing safeguards to prevent unauthorized algorithm changes. 


All in all, the Division recommends that advisors providing electronic investment advice review their portfolio management practices and related disclosures, performance advertising, and marketing materials, written policies and procedures. Advisors relying on the Internet advisor exemption should also review their registration eligibility regularly.


Click here to read the full risk alert.



SEC Issues Risk Alert on Advisory Fee Calculations

  


SEC Issues Risk Alert on Advisory Fee Calculations

On November 10, 2021, the U.S. Securities and Exchange Commission (“SEC”) developed a risk alert in relation to advisory fee calculations. The risk alert was a result of concluding a national initiative where the Division of Examinations (the “Division”) conducted approximately 130 audits of SEC-registered investment advisers with a focus on advisory fees. During the exam, the SEC prioritized evaluating whether advisers’ fees are accurate and fair. They also took a closer look at whether an advisor is appropriately disclosing their fees to clients in a way that is clear and easy to understand.

All examined advisers had a broad range of assets under management, firm organization size, and business operations. However, they all provided investment advice to retail clients. Examiners focused on reviewing policies and procedures related to advisory fees, the accuracy of fees charged, the accuracy and adequacy of advisers’ disclosures, the effectiveness of compliance programs, and finally the accuracy of books and records.

 

Throughout this examination initiative, the Division noted that advisors have a variety of different fee arrangements and calculation methods. However, the most common billing characteristics observed were as follows:

 

  • Standard fee schedules with tiered fee levels based on assets under management.

  • Assessed advisory fees on a quarterly basis.

  • Advisory fees deducted directly from clients’ accounts.

  • Fees calculated based on the account value at the beginning or ending date of the billing period.

  • Calculated fees by using a software or third-party service provider.

  • Fees were documented with clients through a written advisory agreement or contract.

  • Combined family account values to result in lower fees.

 

Deficiencies


During the examinations, the Division identified several deficiencies. Many of these deficiencies resulted in financial detriment to clients. The reported deficiencies are as followed:

 

  1. Advisory fee calculation errors:

    1. Over-billing.

    2. Inaccurate calculations of tiered or breakpoint fees.

    3. Inaccurate calculations due to incorrect householding of accounts.

    4. The use of incorrect client account valuations.


  1. Failing to credit certain fees due to clients:

    1. Pre-paid fees for terminated accounts.

    2. Prorated fees for onboarding clients.


  1. Fee-related compliance and disclosure issues:

    1. ADV Part 2 brochures did not disclose up to date fees or whether fees were negotiable.

    2. ADV Part 2 brochures did not align with a client’s agreement resulting in inconsistent fee disclosures.

    3. Policies and procedures were not maintained to address advisory fees or the monitoring of fee calculations and billing.


  1. Inaccurate financial statements:

    1. Failing to record all advisory fee income, administrative revenue, and compensation expenses in general ledgers and on financial statements.

    2. Preparing financial statements on an accrual basis of accounting while a cash and modified cash basis of accounting was actually used.

 

Best Practices


Concluding the examinations, the staff observed that there is no “one-size fits all” approach when it comes to advisors adopting appropriate policies and procedures. To assist with compliance in the focused areas, it is suggested to (i) adopt and implement written policies and procedures that address the advisory fee billing process and validating fee calculations, (ii) implement a centralized fee billing process and validate that the fees charged to clients are consistent with compliance procedures, advisory contracts, and disclosures, (iii) review fee calculations by utilizing resources and tools, such as a checklist for reconciling fee calculations with advisory agreements, and (iv) ensure all advisory expenses and fees assigned to and received from clients are properly recorded, including those paid directly to advisory personnel.

 

Advisory fees and billing calculations continue to be an area of focus when it comes to investment advisor examinations. Advisors are encouraged to review their current disclosures, agreements, and policies and procedures to ensure that not only are they accurate, but that clients are being provided with full and fair disclosures that are in their best interest.

 

Click here to read the full risk alert.