Prepaid Advisory Fees and Revenue Sharing Cost RIA/BD over $3 Million
The SEC imposed a $3 Million civil monetary penalty on a dually registered RIA/BD for retaining prepaid advisory fees, collecting revenue sharing payments from fund companies, and failing to invest in the lowest-cost share classes available. The respondent billed clients at the beginning of each quarter, but the SEC charges that the adviser’s services – portfolio management, trade execution, performance reporting and account servicing – occurred during the quarter. Therefore, the SEC maintains that the respondent unlawfully retained the prepaid advisory fees when clients terminated before the conclusion of a quarter. The SEC also charges the firm for failing (i) to fully disclose conflicts of interest when receiving revenue sharing and marketing support payments from fund companies and (ii) to utilize the lowest share classes available. The SEC cites violations of the Adviser’s Act’s antifraud provision (206(2)) and the compliance rule (206(4)-7).
OUR TAKE: Charging advisory fees at the beginning of a period drops you into choppy regulatory waters. As the SEC asserts here, how does a firm justify this practice when it has not yet performed services? This practice comes under more scrutiny when a firm fails to refund the fees to terminating clients, thereby creating a financial penalty for clients to sever a relationship.