On June 9, 2026, the SEC’s Division of Examinations issued a Risk Alert titled observations-ia-obligations-related-economic-conflicts-interest-060926, providing important insight into how investment advisers are handling economic conflicts of interest during examinations. The findings reinforce a familiar, but increasingly scrutinized, theme: advisers must not only identify conflicts, but also ensure they are fully disclosed, consistently managed, and aligned with fiduciary obligations.

At its core, the Risk Alert reiterates a foundational principle of the Investment Advisers Act—advisers, as fiduciaries, must either eliminate conflicts of interest or provide full and fair disclosure so that clients can make informed decisions. However, the staff’s observations make clear that many firms continue to fall short in both disclosure and execution.

Economic Conflicts Remain a Persistent Examination Focus

The Division continues to prioritize the review of economic incentives that may influence an adviser’s recommendations. These incentives often arise from compensation arrangements, revenue sharing, or other financial benefits tied to recommending specific products, custodians, or account structures.

Examinations revealed recurring issues across firms, including undisclosed conflicts, disclosures that were incomplete or misleading, and practices that diverged from advisory agreements or written disclosures. The SEC also noted that in many cases, compliance programs were not sufficiently designed to identify or address these risks.

Cash Management Programs Under Scrutiny

A significant portion of the Risk Alert focuses on conflicts tied to cash management recommendations. Advisers frequently recommend programs that automatically sweep client cash into interest-bearing accounts, sometimes held with affiliated institutions.

While these arrangements can be operationally efficient, they often create economic conflicts when advisers receive compensation based on client cash balances. The SEC observed that firms frequently failed to adequately disclose:

• Revenue received from custodians or clearing firms tied to client cash balances
• Incentives to recommend cash sweep vehicles that maximize adviser compensation
• The full impact of fees on client returns, including scenarios where fees eroded or exceeded returns on cash holdings

Particularly notable was the SEC’s concern with the use of conditional language—such as disclosures stating advisers “may” receive revenue—when such compensation was in fact being received. The staff emphasized that this type of disclosure can obscure actual conflicts rather than clarify them.

Share Class Selection and Other Revenue Opportunities

Beyond cash management, the Risk Alert highlights conflicts arising from mutual fund share class selection. In several cases, advisers recommended higher-cost share classes that generated additional compensation—such as 12b-1 fees—despite the availability of lower-cost alternatives.

The Division also identified insufficient disclosure of other revenue streams, including:

• Compensation related to custodial relationships
• Margin lending arrangements and interest markups
• Transaction-related fees and markups

In many instances, clients were not adequately informed that these arrangements created financial incentives influencing adviser recommendations.

Form ADV Disclosure Deficiencies Continue

The Risk Alert underscores ongoing issues with Form ADV disclosures, particularly in Part 2A brochures. The staff observed that advisers frequently failed to fully disclose material conflicts tied to affiliations and compensation arrangements.

For example, firms did not always disclose how affiliated broker-dealers or related entities benefited financially from client activity. Additionally, disclosures regarding broker selection and compensation under Item 12 were often inconsistent with other parts of the brochure or omitted key facts altogether.

These inconsistencies not only create regulatory risk but also undermine the clarity required for clients to understand the true nature of the advisory relationship.

Fee Billing Practices Remain a Major Source of Deficiencies

One of the most consequential areas highlighted in the Risk Alert involves fee calculation and billing practices. The SEC observed multiple instances where advisers charged fees that were inconsistent with client agreements or disclosed methodologies.

Common issues included:

• Prorating fees in ways not disclosed in agreements
• Charging fees on assets that were contractually excluded
• Applying incorrect fee rates or failing to apply breakpoints
• Charging fees for services not provided or for inactive accounts
• Billing clients multiple times for the same services

In some cases, advisers failed to refund unearned fees when client relationships terminated early, particularly where clients had prepaid advisory fees.

These findings are especially significant, as they often result in financial harm to clients and have led to required reimbursements during examinations.

Gaps in Compliance Programs and Controls

The observations also point to broader weaknesses in compliance infrastructure. The SEC found that some advisers lacked written policies and procedures that adequately addressed their billing practices or economic conflicts.

Among the more concerning gaps were:

• Policies that did not address all types of billing arrangements, such as prepaid fees or householding
• Conflicting information across policies, disclosures, and client agreements
• Insufficient controls to monitor fee accuracy and identify calculation errors
• Failures to ensure rebates or refunds were properly issued

In several instances, the absence of robust monitoring controls resulted in clients being overcharged without detection.

Key Takeaways for Investment Advisers

The Risk Alert reinforces that managing economic conflicts is not a one-time exercise, but an ongoing obligation that requires coordination across disclosure, operations, and compliance.

Advisers should view these findings as a roadmap for strengthening their programs. At a minimum, firms should:

• Reassess disclosures to ensure they reflect actual practices and clearly describe conflicts
• Align billing practices precisely with advisory agreements and Form ADV disclosures
• Enhance controls to test fee calculations and monitor for errors
• Regularly review compensation arrangements and affiliated relationships for potential conflicts
• Evaluate whether compliance policies fully address the firm’s business model and risk profile

Conclusion

The SEC’s message is clear: economic conflicts of interest remain a key examination priority, and deficiencies in this area continue to surface across firms of all sizes. The staff’s observations highlight that even well-established practices—such as cash sweep programs or fee billing methodologies—can present significant compliance risk if not properly disclosed and controlled.

Firms that proactively align their disclosures, billing practices, and compliance frameworks with these expectations will be better positioned to withstand regulatory scrutiny and fulfill their fiduciary obligations to clients.