Friday, July 1, 2016

FINRA and SEC to Focus on Advisor Fees

Author: David Schwartz J.D. CPA

Both FINRA and the Securities and Exchange Commission have indicated a renewed interest in the fees charged by investment advisors. In a May 2016 notice, FINRA announced a mutual fund fee waiver sweep intended to gather information regarding whether advisors had mechanisms in place to ensure that mutual fund investors are receiving promised fee waivers and reimbursements.  The SEC’s investor advocate Rick A. Fleming announced in his annual report to Congress published on June 30 that improved disclosure of fees and expenses charged by financial advisers is a top priority for his office in the new fiscal year.  


Failure to disclose fees charged by an investment advisor was also the focus of a May 31, 2016 SEC enforcement action against Connecticut-based investment adviser Momentum Investment Partners LLC (doing business as Avatar Investment Management), and one of its principals, Ronald J. Fernandes.  The SEC filed fraud charges against the advisor for failing to disclose to some of Avatar's advisory clients certain fees they were being charged. The SEC alleged that the adviser and the principal moved  advisory clients’ assets into newly-created mutual funds without informing the clients that the move would increase the fees they would pay without changing their investment strategy or providing any different or additional services. SEC v. Momentum Investment Partners LLC and Ronald J. Fernandes, SEC Lit. Release 23549.


On the regulatory front, the SEC announced on June 13, 2016 that it will adjust dollar threshold amounts for performance-based advisory fees to qualified clients. On May 18, 2016, the SEC announced that the Commission intends to issue an order that would adjust for inflation, as appropriate, dollar amount thresholds in the rule under the Investment Advisers Act of 1940 that permits investment advisers to charge performance-based fees to “qualified clients.”  In a forthcoming order, the Commission will adjust the assets-under-management test and net worth test in the definition of “qualified client” under Investment Advisers Act rules by maintaining the dollar amount of the assets-under-management test at $1,000,000, and increasing the dollar amount of the net worth test from $2,000,000 to $2,100,000.