By Christina Shalhoub, Managing Director, Business Development, U.S.
Executive summary
We helped a registered investment adviser identify and remediate fee billing and expense allocation issues at a prospective acquisition target before transaction close. Through a combined regulatory compliance and forensic accounting review, we quantified client impact, supported remediation planning, and helped reduce potential regulatory and operational risk associated with the acquisition.
Key takeaway: Identifying and addressing fee and expense calculation issues during regulatory mock examinations can help firms reduce regulatory exposure, strengthen client outcomes, and avoid inheriting operational risks post-acquisition.
At a glance
The client challenge
A registered investment adviser engaged IQ-EQ’s U.S. Regulatory Compliance team to conduct a mock SEC examination of a prospective acquisition target as part of its transaction due diligence process.
The target firm operated in a highly regulated environment where fee billing practices and expense allocations must remain consistent with client agreements, Form ADV disclosures, and other governing documents. Maintaining alignment between disclosures and operational processes is critical to meeting regulatory obligations and preserving client trust.
During the mock examination, we identified inconsistencies between the target firm’s stated methodologies and certain fee billing and expense allocation practices. Specifically, client accounts paying advisory fees quarterly in advance were not always receiving timely fee rebates following termination. In addition, some account-level expenses were rounded during billing calculations, which in certain circumstances resulted in clients being charged more than required under the applicable methodology.
The review found no evidence of intentional misconduct. However, the issues highlighted operational practices that were not fully aligned with governing documents and disclosures.
Left unresolved, these issues could have resulted in regulatory scrutiny, client remediation obligations, reputational concerns, and additional liabilities following completion of the acquisition. The client therefore expanded the engagement and asked us to conduct a comprehensive forensic review to assess the full impact of the identified issues.
Our solution
The client required more than a traditional compliance review. While the issues were initially identified through a mock SEC examination conducted by our U.S. Regulatory Compliance team, determining their full impact required both regulatory analysis and detailed financial testing.
To address this, we assembled a multidisciplinary team from across our U.S. Regulatory Compliance and CFO Services teams to perform a coordinated review of the target firm’s fee billing processes, expense allocations, disclosures, and supporting controls.
The engagement began with a detailed assessment of client agreements, governing documents, Form ADV disclosures, and related policies and procedures. Our compliance specialists evaluated whether billing practices and expense allocations aligned with disclosed methodologies, contractual obligations, and regulatory expectations, while identifying areas of potential regulatory and disclosure risk.
Working alongside the compliance team, our CFO Services team conducted independent forensic testing of fee calculations and expense allocation methodologies. This included recalculating advisory fees, reviewing terminated accounts, testing expense allocation practices, and identifying accounts that may have been affected by billing discrepancies.
Unlike reviews that focus solely on compliance or calculation testing, our integrated approach examined both how fees and expenses were disclosed and how they were applied in practice. By combining regulatory expertise with forensic accounting capabilities, we were able to provide the client with a comprehensive view of the issues, including their root causes, regulatory implications, and financial impact.
The findings enabled us to quantify client impact, calculate potential reimbursements, and develop a practical remediation framework. We also supported the design of corrective processes and enhanced controls to help reduce the risk of similar issues occurring in the future.
This coordinated approach provided the client with a clearer understanding of potential acquisition risk and the confidence to make informed decisions ahead of transaction close.
The result
The engagement enabled the client to identify and address fee billing and expense allocation issues before they became examination findings, client concerns, or post-acquisition liabilities.
Key outcomes included:
- Improved visibility: Reviewed five years of terminated account activity and expense allocations across approximately 8,000 client accounts
- Enhanced oversight: Identified accounts affected by unreimbursed advisory fees and expense allocation discrepancies
- Greater confidence: Quantified fee rebates and expense adjustments owed to impacted clients, providing a clear basis for remediation
- Reduced acquisition risk: Enabled the client to assess potential regulatory, operational, and financial exposure before completing the transaction
- Increased operational resilience: Developed a framework for client reimbursements, corrective actions, and enhanced billing controls
- Streamlined delivery: Provided regulatory analysis and independent financial testing through a single, coordinated engagement
Why it matters
Fee billing practices, expense allocations, and related disclosures remain among the most heavily scrutinized areas of SEC examinations and continue to be a common source of operational, regulatory, and client-related risk for investment advisers. As firms pursue growth through acquisition, these risks can be inherited alongside assets, making robust due diligence increasingly important.
Key lessons for advisers include:
- Review both disclosures and calculations: Billing methodologies should be tested in practice, not simply assessed on paper
- Identify issues before they escalate: Early detection can help prevent investor complaints, regulatory findings, and costly remediation efforts
- Take an integrated approach: Combining compliance expertise with financial testing provides a more complete view of risk and potential exposure
- Treat acquisitions as a compliance exercise as well as a commercial one: Operational and regulatory risks can transfer alongside assets and client relationships
This engagement reflects the integrated fee and expense testing approach we use to help advisers validate billing methodologies, assess expense allocations, evaluate related disclosures, and reduce regulatory risk across both client accounts and private funds.
Looking to strengthen fee billing controls?
Our U.S. Regulatory Compliance and CFO Services teams help investment advisers evaluate fee and expense practices, validate billing methodologies, identify regulatory risks, and implement practical remediation strategies. Whether supporting transaction due diligence, a proactive internal review, or remediation efforts, our integrated fee and expense testing approach can help uncover issues before they become investor, auditor, or examination concerns. Get in touch today to discuss your requirements.
