Improper Billing Practices Draw SEC Fraud Charges

 “An adviser that fails to adhere to the terms of these agreements and disclosures, or otherwise engages in inappropriate fee billing and expense practices, may violate the Investment Advisers Act of 1940, and the rules promulgated thereunder, including the antifraud provisions.”

This stern warning regarding fraudulent billing practices was issued in an April 12, 2018, risk alert by the Office of Compliance Inspections and Examinations (OCIE).

Regulators remain determined to enforce cases against advisers engaged in unscrupulous billing practices, a reality made visible when the Securities and Exchange Commission (SEC) filed fraud charges against investment adviser Stephen Brandon Anderson in late May.

Improper Billing Practices Draw SEC Fraud Charges  

The SEC Allegations of Billing Fraud

According to the SEC’s order, Anderson, who owned and operated a North Carolina registered investment adviser, River Source Wealth Management, LLC, overcharged his clients in excess of $367,000, exceeding the agreed-upon maximum customer advisory fees by roughly 40%. 

In addition, Anderson allegedly misled clients about the reason behind transferring their assets from River Source’s long-time custodian, claiming an amicable separation of the two entities.

To the contrary, the order found that the relationship was terminated when the custodian observed irregular billing practices without receiving sufficient supporting documentation from Anderson. 

Additional wrongdoings alleged in the order include:

  • Anderson made material misstatements in reports filed with the Commission
  • Anderson overstated River Source’s assets under management by at least $34 million (18%) in 2015 and $61 million (35%) in 2016
  • River Source failed to implement required compliance policies and procedures

The SEC’s order charged Anderson with violations of Sections 206(2) and 207 of the Investment Advisers Act, and violations of books and records requirements and compliance provisions of the Advisers Act.

Find the complete SEC press release here.

The Consequences

The order carried severe penalties, which required Anderson to:

  • Abstain from acting in a supervisory or compliance capacity or from charging advisory fees without supervision for at least three years
  • Provide notice of the SEC order to clients and prospective clients
  • Agree to a cease-and-desist order and a censure
  • Pay disgorgement and prejudgment interest of $405,381 and a $100,000 penalty

Anderson consented to the order without admitting or denying the allegations.   

Reviewing Your Firm’s Billing Practices: Mitigating Risk and Avoiding Inadvertent Violations

While most firms would never consider the intentional overcharging of client fees acceptable, flawed billing policies and procedures could cause mistakes in client billing, or worse, cause unintentional violations of applicable regulations that could result in unfortunate and costly enforcement.

To prevent these outcomes, we recommend your firm take the following actions:

  • Conduct a thorough review of all billing policies and procedures
  • Be sure client disclosures related to fee structure and billing practices are up to date and compliant with applicable compliance standards, and that any additional fees charged outside normal practices are fully disclosed to the client
  • Construct a mechanism for supervisory oversight that holds all involved parties accountable for remaining in compliance with the firm’s billing protocols

The penalties for fraud, whether intentional or unintentional, are severe, as this case clearly highlights.

If you have any questions, concerns, or require assistance regarding billing practices or disclosure at your firm, or if you need assistance in developing the required policies and procedures to remain in compliance with regulations, our consultants are here to help.

Contact Core Compliance & Legal Services now.