Recent comments from U.S. Securities and Exchange Commission (SEC) Chair Gensler at the Institutional Limited Partners Association Summit and an SEC Division of Examinations (EXAMS) Risk Alert published on the same day highlight the ongoing focus of the SEC on advisory fees, both in the institutional and retail spaces.

In Chair Gensler’s remarks, he expressed concern that private fund investors may not have enough transparent, consistent information regarding private fund fees to “make informed investment decisions.” While he cited previous Risk Alerts issued by EXAMS regarding private fund advisers and the increased regulations imposed on these advisers under the Dodd-Frank Act of 2010, Chair Gensler suggested that it was time to “bring more sunshine and competition to the private funds space.”

On the same day, EXAMS issued a Risk Alert on Advisory Fee calculations, reflecting observations from an examination of approximately 130 SEC-registered investment advisers to retail clients regarding the way advisers charged their fees, adequacy of fee disclosures and the accuracy of fee calculations. In the Alert, EXAMS highlighted the below deficiencies. In doing so, they noted that the advisory fee-related deficiencies observed often resulted in financial harm to clients.

  • Advisory Fee Calculation Errors and Prepaid Advisory Fees
    • The EXAMS Staff observed various errors in advisory fee calculations, including instances of (1) the use of incorrect percentages in calculating advisory fees, (2) double-billing, (3) incorrect client account valuations, (4) inaccurate calculations of breakpoint or tiered fees and (5) inaccurate calculations due to incorrect householding of accounts.
    • The EXAMS Staff also noted that several advisers did not appropriately refund or pro-rate fees. Specifically, they cited instances where advisers were obligated by contract or disclosure to refund unearned advisory fees but failed to do so consistently and in a timely manner.
  • False, Misleading or Omitted Disclosures
    • The EXAMS Staff identified various fee-related disclosure issues, including in Form ADV Part 2 brochures. The Staff indicated that several advisers were missing or had inaccurate disclosure regarding, among other things, (1) current fees charged, (2) negotiability of fees (3) timing of advisory fee billing, (4) cash flows and their effect on fees, and (5) minimum fees, extra fees (including, for example, platform fees or wrap fees) and available discounts.
    • The EXAMS Staff also observed instances of advisers failing to have fee disclosures that was consistent across the Form ADV and other contractual disclosures.
  • Missing or Inadequate Policies and Procedures
    • The EXAMS Staff stated that advisers should have written policies and procedures that specifically address fee calculation (including computing, billing, and testing advisory fees).
    • The EXAMS Staff also cited as problematic policies that refund prepaid advisory fees only upon written notice from clients.
    • The EXAMS Staff suggested that these policies and procedures address “critical advisory fee components” relevant to the advisers’ business, including (1) valuation of illiquid or difficult-to-value assets included in the assets for the calculation of advisory fees; (2) fee offsets, such as those offered for 12b-1 fees; (3) fee reimbursements for terminated accounts, where the client prepaid fees; (4) prorating fees for additions or subtractions of assets in accounts; and (5) family account aggregation (householding) or the application of breakpoints for fee calculations.
  • Inaccurate Financial Statements
    • The EXAMS Staff observed various issues or inaccuracies with financial statements including failing to properly (1) record pre-paid advisory fees as liabilities and (2) record all advisory fee income, administrative fee revenue, and compensation expenses in general ledgers and on financial statements


Chair Gensler’s remarks and the Risk Alert highlight the SEC’s continued focus on accurate calculations, transparency, and full disclosure of advisory fee-related issues.[1]

Advisers should consider reviewing their fee calculation and repayment of pre-paid fee practices, as well as their disclosures across the Form ADV, Investment Management Agreements and other relevant agreements and offering documents. Specifically, Advisers should consider adopting the industry practices highlighted by the EXAMS Staff in the Risk Alert including (1) adopting and implementing written policies and procedures addressing advisory fee billing processes and validating fee calculations, (2) centralizing the fee billing process and validating that the fees charged to clients are consistent with compliance procedures, advisory contracts, and disclosures, (3) ensuring resources and tools established for reviewing fee calculations are utilized, and (4) properly recording all advisory expenses and fees assessed to and received from clients, including those paid directly to advisory personnel. Should these reviews establish that any excessive fees were paid, Advisers should consider proactively remediating those clients.

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1. These focus areas have also been reflected in recent SEC enforcement cases. See e.g., In the Matter of Morgan Stanley Smith Barney LLC, Investment Advisers Act Rel. No. 5499 (May 12, 2020) (alleging that the adviser, among other things, provided retail clients with misleading information regarding costs incurred by wrap-fee program clients); In the Matter of EDG Management Company, LLC, Investment Advisers Act Release No. 5617 (October 22, 2020) (alleging that the adviser failed to adjust quarterly management fee calculations to account for write downs); In re Retirement Capital Strategies Inc., Advisers Act Rel. No. 5065 (Nov. 19. 2018) (alleging that the adviser inconsistently applied tiered “breakpoints” that reduced advisory fees as the total amount of client assets under management increased and failed to aggregate or “household” related account balances of the same client and clients within the same household for the purposes of achieving the advisory fee breakpoint discounts); In re Barclays Capital Inc., Advisers Act Rel. No. 4705 (May 10, 2017) (alleging that the adviser incorrectly calculated the advisory fees based on, among other things, a billing methodology that differed from the advisory agreements); and In re Morgan Stanley Smith Barney, LLC, Advisers Act Rel. No. 4607 (Jan. 13, 2017) (alleging that the adviser charged clients advisory fees that did not reflect negotiated discounts).