Improperly Calculated Advisory Fees Result in Double the Penalty

$1.1 Million. That was the amount Transamerica agreed to pay in order to settle the SEC charges that it improperly calculated advisory fees and overcharged clients. After an SEC examination in 2010, examiners found that Transamerica had offered breakpoint discounts designed to reduce the fees owed to the firm by iStock_000016171603Illustra_HiResaggregating the values of related accounts. Transamerica, however, failed to process every aggregation request and had conflicting policies about requiring the breakpoint discounts to be passed on to all clients. As a result, the SEC found the firm had overcharged certain clients. While the firm went on to provide refunds to some clients, it did not undertake a firm-wide review of all client accounts as the SEC examiners had recommended. During a subsequent examination in 2012, the SEC examiners found that Transamerica was still failing to aggregate certain related accounts and did not have adequate policies and procedures in place to ensure that it was properly calculating its fees. As a result, the firm was required to reimburse current and former clients with refunds and credits totaling $553,624 including interest, and pay an additional $553,624 penalty. Transamerica also had to retain an independent consultant to review its policies and procedures pertaining to its account opening forms, fee schedules, and fee computation methodologies as well as the firm’s account aggregation process for breakpoints.

It is very important for firm practice to be consistent with information provided in marketing materials, Form ADV disclosures and/or on the firm’s website. Be sure you have policies and procedures in place to review firm documents for consistency, and make sure those policies and procedures are reflective of firm practice. Then check, and double check. Periodically test a sample of client fee invoices. Pull the client agreement, and check it against the invoice to ensure the fee charged is the agreed-upon fee. Check to see if the client’s assets have exceeded a breakpoint, and if so, confirm the fee has been adjusted. And finally, run a calculation to ensure the fee is calculated correctly based on the client, or client’s aggregated, assets and in accordance with agreements. Fees are always an area the SEC checks. And for heaven’s sake, if the SEC tells you to do something and you agree to do it . . .then just do it! They WILL check all previous deficiencies for
compliance and really don’t like repeat offenses!

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