Getting the Fee Right: Precise Fee Calculation Matters

A brief guide for investment advisers

Charging the wrong fee is seldom the product of dishonesty. Often it is the result of a governing document that says one thing, a Brochure that says another, and an operational process that never quite reconciles the two. The SEC makes clear, through repeated enforcement actions, that this gap between what an adviser says it will charge and what it actually charges is itself a violation of the Investment Advisers Act (the “Act”) — regardless of intent, firm size, registration status or portfolio investment returns.

This article summarizes the legal standard, why it applies with equal force to small and large advisers alike, and recent SEC actions that illustrate the range of ways a fee calculation error can arise.

Advisers should double check that the language of governing documents, the Brochure and other disclosure documents are accurately translated into mathematical formulas for billing purposes and that invoices accurately reflect the intent of contractual language and disclosures.Ambiguities should be resolved.Fee calculations and methodologies should be succinctly summarized and easily explainable to an SEC examination team.Whenever an adviser will receive a financial benefit from a client there is a potential conflict of interest that must be disclosed and matters of fee calculation are no exception.

The Legal Standard

Section 206(2) of the Advisers Act prohibits an investment adviser from engaging in any transaction, practice, or course of business that operates as a fraud or deceit on a client. Critically, a Section 206(2) violation does not require intent or even knowledge that the conduct was wrong — it can rest on simple negligence. Charging a fee that is inconsistent with a client's advisory agreement, a fund's limited partnership agreement, or the adviser's own disclosures can satisfy this standard even where the discrepancy was inadvertent or was caused by a systems error.

For advisers to pooled investment vehicles, Rule 206(4)-8 separately prohibits false or misleading statements to fund investors, and Section 206(4) and Rule 206(4)-7 require written compliance policies and procedures reasonably designed to prevent violations — including procedures to confirm that fees are actually calculated the way governing documents say they will be. In many cases, the SEC charges both the underlying fee error and a related compliance-program failure.

The SEC does not ask whether an adviser meant to overcharge. It asks simply whether the fee charged matched the fee promised.

Recent Examples

Papamarkou Wellner Asset Management, Inc. (2026)

Papamarkou's advisory agreements and Form ADV Brochure promised clients a dollar-for-dollar offset of their advisory fee for referral fees the firm's affiliated broker-dealer received from third-party fund managers. For six fund managers, however, those referral-fee arrangements also included a share of performance fees — and Papamarkou credited clients only for the management-fee portion, keeping the performance-fee portion without disclosure. The undisclosed conflict of interest, not just the arithmetic, was central to the violation.

Result: $282,921.82 in under-credited offsets; $488,959.05 total (disgorgement, interest, and penalty); violations of Sections 206(2) and 206(4)/Rule 206(4)-7.

In the Matter of Papamarkou Wellner Asset Management, Inc., IA Rel. No. 6984 (July 31, 2026).

TZP Management Associates, LLC (2025)

TZP's fund limited partnership agreements required a 100% offset of certain fees TZP received from portfolio companies against the management fees it charged its funds. TZP nonetheless (1) kept interest it earned on fees it chose to defer, without crediting that interest back, and (2) when multiple funds invested in the same portfolio company, applied a double reduction to each fund's offset that the LPAs did not authorize — reducing the offset once for the fund's share of invested capital, then again for its equity ownership percentage.

Result: $502,041 in excess management fees; $683,877 total; violation of Section 206(2).

In the Matter of TZP Management Associates, LLC, IA Rel. No. 6908 (Aug. 15, 2025).

Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC (2023)

This is a retail — not private-fund — example, and the largest penalty among the cases summarized here. Financial advisors negotiated reduced advisory fee rates with certain clients and wrote the reduced rate directly on the client's advisory agreement. But the negotiated rate was not always entered into the firm's billing system, so the client was billed at the undiscounted standard rate instead. The firm had no periodic testing process to catch this for smaller accounts or for accounts inherited through two acquisitions, so the problem persisted for roughly two decades before a state regulator's inquiry brought it to light.

Result: 10,945 accounts overcharged a combined $26.8 million; ~$40 million repaid with interest; $35 million penalty; violations of Sections 206(2) and 206(4)/Rule 206(4)-7.

In the Matter of Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, IA Rel. No. 6387 (Aug. 25, 2023).

Insight Venture Management, LLC (2023)

Insight's fund LPAs allowed a management-fee reduction when a “portfolio investment” suffered a permanent impairment, but defined “portfolio investment” and “portfolio company” as two distinct things — a single portfolio company could hold several separate portfolio investments. Insight nonetheless evaluated impairment at the aggregated portfolio-company level, netting impaired and non-impaired investments together, which understated the fee reduction owed. Insight also never disclosed the specific four-pronged (and largely subjective) criteria it used to decide when an investment was impaired — criteria that gave Insight considerable discretion over its own fee base.

Result: $773,754.41 in excess fees; $864,958.17 repaid; $1.5 million penalty; violations of Sections 206(2) and 206(4)/Rules 206(4)-7 and 206(4)-8.

In the Matter of Insight Venture Management, LLC, IA Rel. No. 6332 (June 20, 2023).

Colony Capital Investment Advisors, LLC (2024)

Colony's fund LPAs required advance written disclosure to, and approval by, each fund's limited partners or limited partnership advisory committee before the fund could pay an affiliate for services — not merely disclosure after the fact in annual financial statements. Colony routinely disclosed only after expenses were incurred and paid. In one fund, certain property management fees paid to an affiliate were also mischaracterized as reimbursable “costs and expenses” (which did not require advance consent) rather than as fees (which did).Colony did not have reasonably designed policies and procedures in place to determine that each service provided by an affiliate was on an arm’s-length basis as required by the funds’ governing documents.

Result: $350,000 penalty; violations of Sections 206(2) and 206(4)/Rules 206(4)-7 and 206(4)-8.

In the Matter of Colony Capital Investment Advisors, LLC, IA Rel. No. 6671 (Sept. 3, 2024).

Wave Equity Partners LLC (2022)

Wave Equity borrowed money from a fund it managed to pay a third-party placement agent, with the fund's governing documents requiring prompt repayment through an offset against the quarterly management fee. Wave Equity instead used the fee income for its own operating expenses for eleven consecutive quarters without repaying or offsetting the loan — and never told investors that it was out of compliance with the fund's governing documents during that period.

Result: $1,096,443 borrowed and not offset; repaid in full with 12.5% interest ($1,410,185.49); $325,000 penalty; violations of Sections 206(2) and 206(4)/Rule 206(4)-8.

In the Matter of Wave Equity Partners LLC, IA Rel. No. 6146 (Sept. 23, 2022).

EDG Management Company, LLC (2020)

EDG's fund LPA reduced the invested-capital base used to calculate management fees when portfolio securities were written down. EDG simply did not apply that adjustment for five separate write-downs across thirteen quarterly fee calculations — a straightforward failure to follow the fee formula in the governing document, with no allegation of an undisclosed conflict driving the error.

Result: $901,760.91 overcharged; $1,026,642.02 repaid with interest; $175,000 penalty; violations of Sections 206(2) and 206(4)/Rule 206(4)-8.

In the Matter of EDG Management Company, LLC, IA Rel. No. 5617 (Oct. 22, 2020).

Aisling Capital LLC (2018)

Aisling is a New York based venture capital firm and an SEC exempt reporting adviser whose fund LPAs and private placement memoranda required it to offset a fixed percentage of consulting fees it received from portfolio companies against the management fees it charged its funds. For one period involving each of two portfolio companies, Aisling simply kept the entire consulting fee without applying the required offset.

Result: $759,870 overcharged; $860,515 voluntarily reimbursed with interest; $200,000 penalty; violations of Sections 206(2) and 206(4)/Rule 206(4)-8.

In the Matter of Aisling Capital LLC, IA Rel. No. 4951 (June 29, 2018).

SEC v. David A. Nagler and New Line Capital, LLC (pending)

Unlike the settled matters above, this is a case the SEC filed in federal court and is not yet resolved; the allegations below have not been proven. The SEC alleges that New Line's advisory agreement told clients that it would “take care to assure” that New Line’s fee would not exceed 2% of assets under management and that it disregarded that cap for numerous clients; in addition, New Line separately charged undisclosed hourly “consulting” fees after describing such fees only as something it “may” charge. Because the case is pending, it is included here as an illustration of the theory the SEC continues to pursue, not as a concluded precedent.

SEC v. David A. Nagler and New Line Capital, LLC, No. 1:25-cv-00516 (D.N.M., filed June 2, 2025).

What These Cases Have in Common

1. The fee actually charged did not match the formula, cap, or offset described in the governing document — the advisory agreement, LPA, or PPM — whether the mismatch arose from a manual data-entry step, a document ambiguity, or a deliberate choice not to apply a required credit.
2. The Form ADV Brochure and the governing document told clients or investors two different things, or the Brochure described a practice the firm did not actually follow.
3. A discretionary or subjective element of the fee calculation (e.g., what counts as a “permanent impairment,” or how a fee offset is allocated among multiple funds) was not disclosed, creating an undisclosed conflict of interest even apart from the dollar amount involved.
4. In several cases, the firm had no compliance process — no periodic testing, no reconciliation, no second review — designed to catch a fee-calculation error before it compounded over months or years.
5. Self-identifying the error and voluntarily reimbursing clients (as several respondents did) was consistently treated as a mitigating factor, but did not eliminate liability for the underlying violation.

Practical Takeaways

1. Confirm that your advisory agreements, limited partnership agreements or private placement memoranda, and Form ADV Brochure all describe your fee calculation methodology — including any offsets, caps, or exclusions — in the same way.
2. If your fee involves a discretionary determination (impairment, valuation, dividend recapitalization or similar judgment calls), disclose the criteria you actually use, not just the existence of the discretion.
3. Build a periodic, independent check that fees billed match the formula in the governing documents — particularly for accounts or funds inherited through a merger or acquisition, and particularly for smaller accounts that might otherwise escape review.
4. When a fee calculation practice changes or an ambiguity is identified, update every relevant document — agreement, LPA, PPM, and Brochure — at the same time, and consider whether existing clients need amended agreements or additional disclosure, not just prospective ones.
5. If an error is discovered, promptly quantify it, reimburse affected clients and investors with interest, and document the remediation; the SEC consistently credits this even though it does not excuse the violation.

This article is provided for general informational purposes and does not constitute legal advice. Please contact us to discuss how these enforcement trends apply to your firm's specific fee structure and disclosures.