Risk Alert: Review Advisory Fee Calculations for the 2021 Audit Season (before the SEC does)

Securities and Exchange Commission (SEC)The U.S. Securities and Exchange Commission (SEC) has publicly stated that advisory fees and how fees are assessed, calculated, and disclosed to potential investors in the offering memorandums or financial statements will be an area of focus for 2022.

In November 2021, the SEC Division of Examination issued a Risk Alert dealing with deficiencies noted in the examination of several hundred retail advisors. The SEC Staff believe that the issue arose because of poor policies and procedures over the advisory fee calculation and billing area. Numerous errors in the calculation, and disclosure-related issues, were discovered in the advisory fee area.

In October 2021, after a separate series of examinations of advisors to registered funds, the SEC Staff observed again what they believe are poor policies and procedures over the allocation of fees and expenses from the advisor to the funds. The Staff seemed to have concluded that the discrepancies in the allocation and disclosure of fees and expenses were failures in the compliance programs employed by the advisor.

While private fund managers may not believe that these risks relate to them, you should think again. One of Chairman Gary Gensler’s comments was that fees in the registered fund’s space have come down due to competition while advisor fees in private funds are still working off the old “2 and 20 model”. Hence, he is asking the SEC Staff to focus on the transparency of advisory fee arrangements thinking that transparency will encourage more competition among fund managers.

In preparation for year-end, we are recommending those fund managers consider the following steps:

  • Review your disclosures and assure that the fees assessed are consistent with your offering memorandums and Form ADV Part II Brochure.
  • Review the policies and procedures over advisory fee billings and disclosures in your offering memorandums and financial statements.
  • Test your calculations and that the design and application of such calculations are correct.
  • Consider the appropriateness of updating SEC disclosures of side letter arrangements, if any.

For your convenience, click below for each of the links to the SEC proposed rules:

For a deeper discussion, contact either Richard Sowan or Amber Rhodes:

  1. Richard J. Sowan, Managing Partner 214-545-3971
  2. Amber Rhodes, Assurance Director 214-545-3982