As more investors qualify under SEC Rule 205-3, it is becoming more common for advisers to offer performance-based fee arrangements. While these fee structures can help align investor and advisor interests, they also introduce compliance risk, especially when key terms are vague or when processes are not applied consistently. In a recent article published by the National Society of Compliance Professionals (NSCP), Amy Jones and Arin Stancil from Guardian Performance Solutions examine why fee arrangements remain a priority for regulators and how advisers can strengthen their oversight. Read the full article here: Mitigating Compliance Risks in Performance and Asset-Based Fee Arrangements
A recurring theme in the article is that ambiguity creates risk. Critical elements such as how net profits are calculated, how cash flows are handled, how high-water marks work, and the timing of fee crystallization must be defined with precision. These details affect both billing practices and the net-of-fees performance results required when advertising under the SEC Marketing Rule. As firms adopt performance-based pricing, many will also need to maintain modeled net returns to ensure marketing materials remain compliant.
The article also highlights how valuation practices and documentation gaps can lead to billing errors, even with traditional asset-based fees. When valuation methods differ from what is disclosed in client agreements or Form ADV, the result is inconsistent billing practices and elevated regulatory examination exposure. Recent SEC enforcement actions show that both calculation mistakes and poor transparency can lead to significant penalties.
Ultimately, strong fee governance depends on precise agreements, consistent documentation, and regular testing throughout the year. When firms approach fee oversight as a continuous process, they strengthen billing accuracy, support reliable performance reporting, and demonstrate a proactive compliance culture to regulators.
