SEC and New York Attorney General’s Office Announce Settlements with Two Firms for Allegedly Overcharging Advisory Clients

January 31, 2017

In recent weeks, the U.S. Securities and Exchange Commission (“SEC”) and the New York State Office of the Attorney General (“OAG”) announced three settlements related to, among other things, the advisers allegedly overbilling their advisory clients. On January 13, 2017, the SEC announced a settlement with a large, diversified financial services firm pursuant to which the adviser reimbursed more than $16 million in fees, plus interest, and paid a penalty of $13 million. Settlements with a second large, diversified financial services firm were announced by the OAG on January 12, 2017 and by the SEC on January 26, 2017. Pursuant to the settlement with the OAG, the adviser agreed to reimburse more than $22.5 million in fees, plus interest, and pay a penalty of $1 million to New York State. Pursuant to the settlement with the SEC, the adviser agreed to reimburse approximately $3.2 million in fees, plus interest, and pay a penalty of $14.3 million.

According to the SEC’s orders against both advisers, the advisers allegedly failed to adopt written policies and procedures reasonably designed to ensure that clients were billed accurately. For example, one of the SEC’s orders states that the adviser “did not, as part of its periodic fee testing, conduct targeted testing of accounts with attributes, or that experienced changes, that created an increased risk of fee error, and its testing was limited to checking calculations against billing rates contained in the firm’s billing system without validating such information against client contracts, fee billing histories, and other documentation.”

Additionally, both advisers were charged by the SEC with failing to preserve and maintain client contracts in accordance with the requirements of Rule 204-2 under the Investment Advisers Act of 1940 and the advisers’ written policies and procedures. In one of the orders, the SEC states that "[w]ithout the advisory contract, [the adviser] is unable to determine what advisory fee rate was negotiated by the advisory client and cannot, therefore, determine whether the advisory fee rate billed to the client was accurate.”

In light of these settlements, ACA recommends that firms conduct a detailed review of:

  • the firm’s written policies and procedures to address the billing of client accounts;
  • disclosures made to clients regarding the firm’s methodologies to calculate fees;
  • the firm’s policies and procedures to preserve and maintain client advisory agreements;
  • the firm’s processes to input client fee schedules into its billing systems and to validate that the rates in the billing systems are consistent with the rates in the client agreements; and
  • the firm’s processes to conduct targeted testing of accounts that may be at increased risk for billing errors, including, but not limited to:
    • accounts that have negotiated advisory fees that are different from the standard rates charged to clients for the same service;
    • accounts that receive fee breakpoints based on assets under management;
    • accounts that are aggregated for billing purposes (e.g., at the client relationship or household level);
    • accounts in which a portion of the holdings are excluded from the billable assets (“below-the-line”); and
    • accounts where a pre-paid fee may be subject to adjustment, for example, due to large contributions or withdrawals or because the advisory relationship was terminated in the middle of the billing period.

How ACA Can Help
ACA offers focused Fee and Expense Practices Reviews to assist firms in validating that the fees charged to clients are consistent with the methodologies and rates that have been agreed upon between the adviser and the client. The Fee and Expense Practices Review entails an end-to-end review of the firm’s billing practices and detailed testing of a risk-based sample of client accounts to ensure that fees are being calculated correctly. The Fee and Expense Practices Review prepares firms for regulatory scrutiny by helping them to identify and address potential weaknesses in their processes and controls that may present an increased risk of charging clients an incorrect advisory fee.

For More Information
If you have questions about the SEC and OAG’s recent settlements or would like more information on our Fee and Expense Practices Reviews, please contact: Damon Zappacosta or your ACA consultant, or visit www.acacompliancegroup.com.