On June 9, 2026, the Securities and Exchange Commission’s (SEC’s) Division of Examinations (the Division) issued a Risk Alert (the Alert) providing observations from its examinations of SEC-registered investment advisers regarding economic conflicts of interest.
The Division staff identified (1) economic conflicts of interest that were undisclosed (or for which disclosures were incomplete or misleading), (2) adviser practices that were inconsistent with advisory agreements and disclosures, and (3) compliance programs that did not fully address economic conflicts of interest and risks.
Key Takeaways
As highlighted in the Alert, the identification and disclosure of economic conflicts of interest and the proper calculation of fees remain longstanding and important examination priorities for Division staff. When reviewing their compliance programs, advisers should consider the following actions:
- Review disclosures to ensure that all material and economic conflicts of interest are fully and fairly disclosed to clients, with particular emphasis on:
- cash management programs;
- revenue sharing arrangements with broker-dealers or custodians;
- mutual fund share class selection; and
- other economic benefits to advisers with respect to recommendations regarding custodial credits, margin loans, and transaction markup fees.
- Scrutinize the use of the word “may” in situations where a conflict actually exists.
- Compare fee billing practices against Form ADV Part 2A disclosures, client advisory agreements, and other disclosure documents to confirm they are consistent.
- Review Form ADV Part 2A disclosures in Item 10 (Other Financial Industry Activities and Affiliations) and Item 12 (Brokerage Practices) to ensure accuracy and proper identification of conflicts of interest.
- Review billing policies, procedures, and practices on a routine basis to ensure they are accurate and consistent with disclosures, client advisory agreements, and compliance policies and procedures.
- Implement procedures to identify and address new economic conflicts of interest in a timely manner.
Staff Observations
The staff identified deficiencies in the following areas:
Conflicts of Interest Associated With Cash Management Recommendations
The staff observed advisers that recommended programs where clients’ uninvested cash was automatically moved into interest-bearing accounts (cash management recommendations) but omitted and/or did not make full disclosures regarding:
- Revenue sharing arrangements. Advisers omitted material information or provided misleading disclosures regarding revenue sharing arrangements they had with clearing broker-dealers or clients’ custodians, including failing to disclose: (1) revenue received from certain custodians based on the cash balances their clients held with those custodians, and (2) incentives to recommend cash sweep vehicles that resulted in the greatest possible compensation to advisers.
- Cash sweep programs. Advisers also included misleading language in disclosure statements regarding third-party bank cash sweep programs. Certain advisers stated that they “may” receive revenue for client cash balances held in these programs when, in fact, advisers did receive revenue from such programs.
- Fees, expenses, and conflicts of interest. Advisers did not fully and fairly disclose the fees, expenses, and conflicts of interest related to the advisers’ recommendations of cash management programs. For example, advisers omitted disclosures stating that certain clients’ cash balances were subject to asset-based fees and/or omitted disclosures regarding the impact of those fees on clients’ cash balances.
- Money market fund share class selection. Advisers did not make full and fair disclosure to clients regarding the economic benefits received based on their money market fund share class selection recommendations. For example, advisers did not disclose that: (1) their only cash management recommendations were higher-cost money market funds that engaged in revenue sharing programs with the advisers, and (2) lower-cost shares of the same money market funds were available and did not provide such revenue sharing arrangements.
Conflicts of Interest Associated With Other Revenue Opportunities
- Mutual fund share class selection. Advisers did not make full and fair disclosures to clients regarding their recommendations of mutual fund classes that paid Rule 12b-1 fees to an adviser, affiliated broker-dealer, or individual adviser representative when a lower-cost share class for the same mutual fund was available.
- Other economic benefits. Advisers failed to fully and fairly disclose to clients: (1) the economic benefits received by advisers with respect to recommendations regarding custodial credits, margin loans and credits, and transaction markup fees; (2) receipt by broker-dealer affiliates of revenue in connection with interest rate markups on margin loans made by advisory clients; (3) receipt of credits by advisers for custodial and clearing relationships; and (4) marking up clearing brokers’ fees.
Disclosing Fees and Economic Conflicts of Interest in Form ADV Part 2A
- Item 10. Advisers did not fully disclose certain financial activities and affiliations as required by Item 10. For example, advisers omitted disclosures regarding material conflicts of interest created through compensation arrangements with affiliates, such as arrangements with affiliated broker-dealers.
- Item 12. Item 12 requires advisers to disclose the factors they consider in selecting or recommending broker-dealers for client transactions. Advisers made disclosures under Item 12 that were inconsistent with other disclosures or were incomplete, including, for example, failing to disclose material facts regarding revenue sharing arrangements with clearing agencies.
Fees Deviating From Advisory Agreements and Fee-Related Disclosures
- Calculating fees consistent with advisory agreements and disclosures. Advisers failed to calculate advisory fees consistent with disclosures in their Form ADV and/or the terms of written advisory agreements, including: (1) prorating advisory fees; (2) charging asset-based advisory fees on holdings specifically excluded from the fee billing calculations; (3) assessing incorrect fee rates to clients, including not applying reduced asset-base fee rates for cash and fixed income assets; and (4) not rebating certain transaction fees.
- Calculating fees consistent with services actually provided. Advisers assessed fees to clients for services not rendered or assessed higher fees than agreed to for services provided, charged fees on inactive accounts, and/or engaged in duplicative fee billing.
- Refunding unearned fees. Advisers did not issue refunds to clients who were billed in advance and terminated their advisory agreements prior to the end of the billing period.
Compliance Programs Identifying and Addressing Fee-Related Issues
- Billing arrangements. Advisers’ policies and procedures did not fully address the billing arrangements applicable to their clients, including prepaid fees, fee reductions, and margin on client accounts.
- Disclosure of advisory fee-related practices. Advisers’ compliance policies and procedures, signed client agreements, and other client disclosures contained conflicting fee information, and in certain instances included schedules or narratives that were inconsistent, overly complicated, or difficult to reconcile with other related disclosures.
- Monitoring for accurate fee-billing. Advisers lacked controls to: (1) monitor the accuracy of all types of client fees assessed, (2) establish procedures to test for calculation errors, and (3) evaluate whether rebates or refunds were issued to terminated accounts.
If you have questions about this Client Alert, please contact one of the authors listed below or the Latham lawyer with whom you normally consult.
