On August 25, 2023, the SEC accused a dually registered investment adviser/broker-dealer with overcharging thousands of clients. The firm overcharged approximately 10,945 investment advisory accounts by more than $26.8 million in advisory fees. The firm agreed to pay a $35 million civil penalty to settle the SEC’s charges. It also paid affected accountholders around $40 million, including interest, to compensate them for the overcharges. In addition, the firm agreed to be censured and to cease-and-desist from further violations.
The SEC determined that the firm and its predecessors overcharged certain clients who opened accounts prior to 2014 for advisory fees incurred through December 2022. The SEC found that the Registered Investment Adviser (RIA) willfully violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder.
Acquisition of other RIAs can cause billing and overcharging problems
According to the SEC, some financial advisers of the firm and its predecessors agreed to reduce their standard, pre-set advisory fees for certain clients. These predecessor firms used advisory contracts referred to as “shelf” agreements to open new advisory client accounts. These “shelf” agreements were hard copy versions of their standard advisory contracts.
Some of these financial advisers made handwritten or typed changes on the clients’ investment advisory agreements, which reflected the reduced fees charged when their accounts were opened. In certain cases, however, account processing employees failed to input the agreed-upon reduced advisory fee rates into the firms’ billing systems when onboarding clients’ accounts. The SEC discovered that the firm did not conduct any review or periodic testing of clients’ accounts opened by its predecessor entities to confirm that negotiated fee changes to the advisory agreements were implemented.
When the SEC uncovers compliance mistakes like this, the Commission almost always identifies weaknesses in firms’ policies and procedures. The SEC alleged that the firm failed to adopt and implement written compliance policies and procedures that were reasonably designed to ensure that its billing systems contained accurate data. These policies and procedures were not sufficient to prevent overbilling of the clients acquired through its predecessor firms, as well as certain new clients.
In the Commission’s press release, Gurbir S. Grewal, Director of the SEC’s Enforcement Division, reinforced the importance of robust policies and procedures. “Investment advisers must adopt and implement policies and procedures to ensure that they honor their agreements with all of their clients, including legacy clients of predecessor firms,” Grewal said.
Takeaways
RIAs may negotiate reduced advisory fees with their clients. It is imperative, however, that they honor those agreements and implement those fee changes. According to Grewal, “Today’s enforcement action underscores the need for firms growing their businesses through acquisition to ensure that their growth does not come at the expense of client protection.”
The SEC’s press release and order is available here.
About RIA Compliance Group: RIA Compliance Group is an investment adviser compliance consulting firm based in Delray Beach, Florida. The firm’s mission is to provide affordable, timely, practical, and cost-effective compliance advice. We help investment advisers to comply with the myriad of state and SEC regulations and compliance obligations facing their firms. RIA Compliance Group takes pride in giving personal service and real world compliance advice, not theoretical concepts and legalese. The firm interacts on a daily basis with SEC and state securities regulators.
RIA Compliance Group, LLC – 701 SE 6th Ave, Suite 201, Delray Beach, FL 33483 – Tel: 561-600-0564 – sales@ria-compliance.com
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