the SEC proposed amendments to Form N-PORT that would largely roll back or revise elements of the SEC’s 2024 Form N-PORT amendments, which had contemplated monthly public Form N-PORT reporting on an accelerated 30-day deadline.

Insight Analytical Note

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SEC Charges Adviser and Individuals for Overbilling and Falsifying Compliance Reviews

Background:

  • On July 11, 2025, the SEC charged an investment adviser (1) and two individuals for failing to adequately disclose compensation arrangements with an affiliated broker-dealer and falsifying annual compliance reviews by backdating them.
  • The firm returned $4.5 million in overbilled fees, along with about $842,512 in interest. The firm also paid $1.75 million in a penalty. In addition, each individual paid a civil monetary penalty.
  • This case underscores two key enforcement trends:
    • The SEC’s strict approach to disclosure adequacy—especially in affiliated arrangements.
    • The Atkins Commission’s readiness to charge individuals for personal misconduct.

Key Issues:

  • Brokerage Fee Disclosures
    • Arrangement: The adviser cleared trades through Broker A via an affiliated broker-dealer. Initially, Broker A marked up trades and returned the markup to the affiliate. Later, fees were contractually fixed and fully remitted to the affiliate, which in turn paid Broker A a flat fee based on client volume.
    • Disclosure: ADV Part 2 stated that Broker A “will determine the amount of transaction charges” and highlighted conflicts of interest arising from the affiliation.
    • SEC Allegation: The SEC argued that this language was misleading, since fees were contractually set—not determined by Broker A—making the disclosure inadequate.
    • IRP Analysis: The claim appears aggressive in isolation, but likely reflects the SEC’s view when compounded with other deficiencies (e.g., falsified records).
  • Overbilling – Alternative Investments
    • Disclosure stated that illiquid alternatives would be excluded from the management fee base. In practice, no reliable process existed to identify and exclude these positions, resulting in systematic overbilling.
  • Overbilling – Closed Accounts
    • Fees were charged quarterly in advance, with a policy and disclosure to pro-rate refunds for accounts closed mid-quarter. However, there was no process to track and implement refunds, causing improper retention of fees.
  • Backdated Compliance Reviews (Rule 206(4)-7)
    • The adviser had not completed a written annual compliance review for three consecutive years and even though Rule 206(4)-7 does not require a review to be written, the adviser’s own policies and procedures did.
    • During an SEC exam, the firm created and backdated the missing reviews and presented them to staff. Both individuals responsible were personally charged for falsifying documents.

Takeaways:

  • Falsifying Records Is a Bright-Line Violation: Fabricating documents or parts of documents, especially during an exam, almost guarantees enforcement. Even issues that could be resolved through deficiency letters may escalate if misconduct suggests deception. Never falsify records or backdate documents, and exercise extreme caution if considering withholding materials.
  • Disclosure Must Be Specific and Accurate: Even when general disclosures exist, precision matters. Here, the SEC parsed subtle language around fee determination to support its charges. This case illustrates that technical inaccuracies in conflict disclosures can carry significant risk—particularly if other compliance failures exist.
  • Fee Billing Processes Require Testing and Oversight: Don’t assume finance teams are safeguarding billing accuracy. Advisers need robust controls and periodic testing to ensure, fees and disclosures align with actual billing practices.
  • Failure to Follow Your Own Policies Is a Compliance Violation: Under the SEC’s Compliance Rule (Rule 206(4)-7), it is a violation to adopt policies and procedures that your firm does not follow—even if those procedures go beyond what is required by law or regulation. SEC examiners routinely compare written policies with actual practice. This is a fundamental part of their review process. To reduce regulatory risk: (1) Ensure all policies in your compliance manual are fully implemented; (2) Eliminate any policies that are unnecessary or not followed to avoid creating obligations your firm doesn’t meet.  Regularly aligning your manual with actual practices helps maintain credibility and reduces the likelihood of findings during an exam.

(1) In the matter of American Portfolio Advisors, Inc.