When the SEC charged Adit Ventures Management and its CEO with defrauding investors through undisclosed fees and unauthorized transactions, the complaint highlighted a recurring issue: advisory firms often treat disclosure as an afterthought rather than a fiduciary obligation. The alleged violations included millions in unauthorized "acquisition fees," undisclosed principal transactions, and misrepresented share costs, all stemming from inadequate fee disclosure controls.
If your organization is building or auditing a fee disclosure framework, you need a policy that not only satisfies Form ADV requirements but also ensures operational accountability. This template provides a document that aligns fee authorization with client communication, transaction approval, and periodic validation.
Purpose of This Template
This Fee Disclosure and Authorization Policy establishes the control framework for charging, disclosing, and documenting all fees and compensation arrangements at an SEC-registered investment adviser. It addresses three critical control objectives:
- Pre-authorization: Every fee type must be defined in governing documents before it's charged.
- Transaction-level disclosure: Clients receive specific disclosure when principal transactions or non-standard fees apply.
- Periodic reconciliation: Fees charged are validated against authorized fee schedules quarterly.
The template is designed for firms managing private funds, separately managed accounts, or pooled investment vehicles where fee structures vary by client and transaction type.
Prerequisites
Before implementing this policy, ensure you have:
- Current Form ADV Part 2A and 2B filings that describe your fee structure.
- Fund documents (limited partnership agreements, private placement memoranda) or investment management agreements for each client relationship.
- A fee schedule matrix that maps client type to authorized fee categories.
- Access to your accounting or fund administration system's fee calculation and billing records.
- Defined roles: a Chief Compliance Officer (CCO) or equivalent who approves fee changes, and operations personnel who execute billing.
Executive buy-in is essential. This policy requires pre-transaction review for principal trades and acquisition fees, which can slow deal execution if portfolio managers aren't prepared for the approval workflow.
The Template
[FIRM NAME] Fee Disclosure and Authorization Policy
Effective Date: [Date]
Policy Owner: Chief Compliance Officer
Review Cycle: Annual
1. Scope
This policy applies to all fees, compensation, and transaction-based charges imposed on advisory clients, including management fees, incentive compensation, acquisition fees, transaction fees, and any allocation of expenses to client accounts or funds.
2. Fee Authorization Requirements
2.1 Governing Document Standard: No fee may be charged unless explicitly authorized in the client's investment management agreement, limited partnership agreement, or equivalent governing document. Authorization must include:
- Fee type and calculation methodology.
- Timing of assessment (e.g., quarterly in advance, annually in arrears).
- Party responsible for payment.
- Any conditions under which the fee may be waived or modified.
2.2 New Fee Approval: Any fee type not currently described in Form ADV Part 2A requires CCO approval and a determination of whether an interim amendment filing is required under Item 5 of Part 2A.
2.3 Principal Transaction Consent: Transactions where the adviser or a related person acts as principal require specific written client consent for that transaction, separate from general fee authorization. Consent must disclose:
- The adviser's role as principal.
- The cost basis to the adviser.
- The price to the client.
- Any markup or compensation retained by the adviser.
3. Disclosure Controls
3.1 Pre-Transaction Disclosure: Before executing any transaction subject to an acquisition fee, transaction fee, or principal markup, the portfolio manager must submit a Fee Disclosure Memo to the CCO documenting:
- Transaction description and client account(s) affected.
- Fee amount or calculation.
- Citation to governing document provision authorizing the fee.
- For principal transactions: cost basis, client price, and markup percentage.
3.2 Quarterly Client Reporting: Client statements and fund financial reports must itemize all fees charged during the period, broken down by fee type. Generic labels like "advisory fees" are insufficient; use specific categories (e.g., "management fee," "acquisition fee, Series B transaction").
3.3 Annual Disclosure Review: The CCO reviews Form ADV Part 2A annually and confirms that all fee types charged during the prior twelve months are accurately described. Any discrepancy triggers an amendment filing within 90 days.
4. Operational Controls
4.1 Fee Schedule Matrix: Operations maintains a Fee Schedule Matrix listing each client, the governing document version, and authorized fee types with rates. This matrix is the authoritative reference for billing.
4.2 Billing Reconciliation: Before processing quarterly management fee invoices, Operations reconciles calculated fees against the Fee Schedule Matrix and flags any discrepancies for CCO review.
4.3 Acquisition Fee Log: All acquisition fees, transaction fees, and principal transaction markups are recorded in a centralized Acquisition Fee Log, including transaction date, fee amount, governing document citation, and client consent documentation reference.
5. Prohibited Practices
The firm prohibits:
- Charging any fee not disclosed in governing documents or Form ADV.
- Using client assets as collateral for firm credit facilities without explicit authorization in fund documents and advance written notice to affected clients.
- Executing principal transactions without transaction-specific client consent.
- Misrepresenting the cost basis of securities sold to clients in principal transactions.
- Taking loans from client funds unless authorized by fund documents and disclosed in Form ADV.
6. Compliance Monitoring
6.1 Quarterly Testing: Compliance samples 20% of fee transactions each quarter and validates: (a) authorization in governing documents, (b) accurate calculation, and (c) proper disclosure to clients.
6.2 Annual Fiduciary Assessment: The CCO conducts an annual review of all related-party transactions, principal trades, and non-standard fee arrangements to assess whether they meet the fiduciary standard under the Investment Advisers Act of 1940.
How to Customize It
Adjust the approval thresholds: If your firm rarely uses acquisition fees or principal transactions, you might require board-level or advisory committee approval rather than just CCO sign-off. Conversely, if these are routine, establish a pre-approved framework (e.g., principal trades are permitted if markup doesn't exceed 5% and cost basis is disclosed).
Tailor the fee categories: Replace generic references with your actual fee types. If you charge performance fees, add specific provisions addressing the calculation period, high-water marks, and the timing of investor notification. If you allocate fund expenses (legal, audit, administrator fees), define which expenses are allocable and the methodology.
Integrate with your systems: Reference your specific platforms. If you use a fund administrator, specify their role in fee calculation and the reconciliation handoff. If billing is managed in-house, document the system of record and the controls around manual adjustments.
Define escalation paths: Specify what happens when a discrepancy is found. Does Operations halt billing? Does the CCO notify the board? Build in a remediation protocol that includes client notification if fees were overcharged.
Validation Steps
After adopting this policy, validate its effectiveness through these steps:
1. Governing Document Audit: Pull every active investment management agreement and fund document. Create a spreadsheet mapping each client to authorized fee types. Compare this to your Fee Schedule Matrix. Any mismatches indicate either unauthorized fees or outdated documents.
2. Form ADV Cross-Check: Review your current Form ADV Part 2A, Item 5 (Fees and Compensation). Confirm that every fee type you've charged in the past twelve months is described. If you find fees charged but not disclosed, file an amendment and assess whether you need to offer fee refunds.
3. Principal Transaction Sample: Identify all transactions in the past year where your firm acted as principal. For each, confirm you have: (a) transaction-specific client consent, (b) disclosure of your cost basis, and (c) documentation that the markup was reasonable. Missing any of these elements signals a fiduciary breach you'll need to remediate.
4. Acquisition Fee Reconciliation: If you charge acquisition fees, pull the transaction history and verify that each fee corresponds to a closed deal and was authorized in the fund documents. Fees charged for transactions that didn't close or weren't disclosed are red flags for enforcement risk.
5. Quarterly Compliance Testing: Run your first quarterly sample per Section 6.1. If you find calculation errors or missing documentation in more than 10% of sampled transactions, your operational controls need tightening before the next audit cycle.
This policy won't prevent every disclosure failure, but it creates the control environment that separates firms with fiduciary discipline from those that treat fee authorization as a formality. The SEC's allegations against Adit Ventures Management centered on violations of the antifraud provisions of the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Advisers Act of 1940, statutes that impose strict liability when advisers misrepresent fees or breach fiduciary duties. Your policy makes those breaches harder to commit and easier to detect before they reach an examiner's desk.
