CLIENT ALERT: SEC Division of Examinations Issues Risk Alert on Investment Adviser Conflicts of Interest

Jun 18, 2026

KEY TAKEAWAYS

On June 9, 2026, the SEC’s Division of Examinations issued a risk alert identifying various compliance deficiencies it has observed during examinations of SEC-registered investment advisers relating to economic conflicts of interest (the “Risk Alert”).
The Risk Alert highlights recurring issues with advisers’ cash management recommendations, mutual fund share class selection, revenue sharing arrangements, and fee-billing practices.
This coincides with recent SEC enforcement actions against investment advisers for undisclosed conflicts of interest, underscoring that the SEC is actively pursuing these issues through both examinations and enforcement.
SEC registered investment advisers should review their disclosure practices, fee-billing procedures, and compliance programs to ensure alignment with their fiduciary obligations.

THE RISK ALERT

Under the Investment Advisers Act of 1940, investment advisers have a fiduciary duty to either eliminate or fully and fairly disclose all economic conflicts of interest that could influence the objectivity of their advice. The Division of Examinations has prioritized the review of economic incentives that advisers and their financial professionals may have to recommend certain products, services, or account types to clients since at least 2021.

The Risk Alert synthesizes the Division’s examination observations across five key areas:

1. Cash Management Recommendations

The Division of Examinations staff observed that advisers received revenue in exchange for recommending programs through which their clients’ uninvested cash was automatically moved into interest-bearing accounts and provided the below examples.

Revenue Sharing Arrangements. Advisers omitted material information or provided misleading disclosures regarding revenue sharing arrangements with clearing broker-dealers or custodians. This included failing to disclose revenue received based on client cash balances and incentives to recommend cash sweep vehicles that maximized adviser compensation. Notably, the Division flagged that disclosures stating that an adviser “may” receive revenue from third-party bank deposit sweep programs were inadequate where the adviser actually did receive such revenue. The SEC’s 2019 Fiduciary Interpretation identified this practice of using the word “may” as inadequate disclosure.

Fees & Expenses. Advisers failed to disclose that client cash balances were subject to asset-based fees and omitted information about the impact of fees on investment returns, including instances where clients generated negative returns due to fees and expenses associated with recommended cash management programs.

Money Market Fund Share Class Selection. Advisers did not disclose that their cash management recommendations were higher-cost money market funds participating in revenue sharing programs with the advisers, or that lower-cost shares of the same funds were available without such revenue sharing arrangements.

2. Other Revenue-Related Conflicts

Mutual Fund Share Class Selection. The Division of Examinations also observed conflicts arising from mutual fund share class selection outside the cash management context. Advisers selected fund share classes that paid the adviser (as a dually registered broker-dealer), its related entities, or its individual representatives fees pursuant to Rule 12b-1 under the Investment Company Act of 1940, when lower-cost share classes of the same funds were available.

Other Undisclosed Revenue Sources. The Division of Examinations also found that advisers failed to disclose that their broker-dealer affiliates received revenue from interest rate markups on margin loans, or that the advisers received credits for custodial and clearing relationships and would incur termination fees if those relationships ended. Some advisers also assessed additional fees to clients beyond what clearing broker-dealers charged, including marking up clearing brokers’ fees without disclosure.

3. Form ADV Disclosure Deficiencies

The Division of Examinations identified compensation-related misstatements and omissions in advisers’ Form ADV Part 2A brochures in two key areas:

Item 10. Advisers’ Form ADV brochures failed to fully disclose financial industry activities and affiliations, including material conflicts of interest created through compensation agreements with affiliates. For example, affiliated broker-dealers indirectly benefited from revenue generated through services the clearing firms provided for advised clients.

Item 12. Advisers were also observed failing to adequately disclose, or making inconsistent disclosures regarding, factors they considered when choosing broker-dealers or determining the reasonableness of their compensation. Advisers with revenue sharing arrangements with clearing agencies did not disclose all material facts regarding those relationships.

4. Fee-Billing Inconsistencies

The Division of Examinations observed that advisers were charging clients fees that were inconsistent with advisory agreements, the advisers’ disclosures, or both. The Risk Alert identified that advisers:

Prorated advisory fees for mid-period deposits or withdrawals when agreements and disclosures did not address proration;
Charged asset-based fees on holdings specifically excluded from fee calculations per advisory agreements, such as initial cash inflows and fixed income assets;
Failed to apply reduced fee rates for cash and fixed income assets;
Failed to rebate transaction fees for which, per advisory agreements, clients should not have been charged;
Charged fees for services not actually provided, including fees on accounts where advisory personnel had departed and accounts were never reassigned, and fees on inactive accounts that clients had requested in writing to be closed;
Double-billed clients for the same services; and
Failed to refund unearned fees to clients who terminated agreements before the end of a prepaid billing period.

5. Compliance Program Deficiencies

The Division found that many advisers’ compliance programs did not adequately address fee-related risks. Specific deficiencies included:

Policies and procedures that did not address all billing arrangements applicable to clients, such as prepaid fees, fee reductions, householding, and margin on client accounts;
Conflicting information across compliance policies, client disclosures, and advisory agreements regarding fees; and
Lack of controls for monitoring the accuracy of fee calculations, applying rebates, and issuing refunds to terminated accounts.

RECENT SEC ENFORCEMENT ACTIONS TARGETING ADVISER CONFLICTS OF INTEREST

The Risk Alert dovetails with the Division of Enforcement’s recent enforcement priorities. In the first quarter of 2026 alone, the Division of Enforcement brought multiple enforcement actions against investment advisers for undisclosed conflicts of interest.

Undisclosed SPAC Conflicts. The SEC settled fraud charges against a registered investment adviser for failing to disclose conflicts of interest arising from a SPAC transaction. The SEC found that the firm purchased founders’ shares in a SPAC sponsor valued at more than $3 million and then invested over $160 million of client assets into the same SPAC transaction. Because the value of the founders’ shares depended on the completion of the merger, the firm had a financial incentive to see the deal close, even if doing so was not in its clients’ best interests. Following the merger, the sponsor shares increased in value while the firm’s clients’ investments decreased. The firm agreed to pay a $200,000 penalty.

Hedge Clauses and Custody Rule Failures. The SEC settled fraud and other charges against two investment advisers for requiring clients to sign advisory agreements containing liability disclaimers/hedge clauses and assignment provisions that could lead a client to incorrectly believe the advisers’ fiduciary obligations had been limited. The SEC also found that the firms had custody of client assets without obtaining the required independent public accountant verification. The firms agreed to a combined $150,000 penalty.

Private Fund Loan Valuation Failures. The SEC settled charges against a formerly registered investment adviser for selling loans to private fund clients without reasonably determining whether those trades were at fair market value during the COVID-19 market disruption. As a result, the firm breached its fiduciary duty, and failed to follow procedures set forth in disclosures, to its clients. The firm agreed to a $900,000 penalty.

Robo-Adviser Cash Allocation Conflicts. The SEC settled charges against an investment adviser for breaching its fiduciary duty by failing to disclose that it had set cash allocation percentages for certain “no fee” robo-advised accounts in a manner designed, in part, to generate financial benefits for the adviser’s affiliates. This practice allowed an affiliated broker-dealer and bank to recoup revenue the adviser lost from not charging an advisory fee. The firm agreed to a $500,000 penalty.

PRACTICAL IMPLICATIONS

Investment advisers should consider taking the following steps to mitigate risk:

Review all disclosure documents, including Form ADV, advisory agreements, and client-facing materials, to ensure that economic conflicts of interest are fully and fairly disclosed, and that the use of hedging language such as “may” is appropriate and not misleading;
Audit fee-billing practices against advisory agreements and disclosures to confirm that fee calculations, proration methods, fee rate breakpoints, and exclusions are applied consistently and accurately. The Risk Alert’s detailed examples of billing inconsistencies provide a roadmap for internal audits;
Evaluate valuation practices for any transactions between the adviser and affiliated funds or accounts;
Scrutinize cash management and share class recommendations to confirm that revenue sharing arrangements, available lower-cost alternatives, and the impact of fees on client returns are fully disclosed;
Assess compliance programs to ensure that written policies and procedures specifically address all billing arrangements, revenue sharing, and economic conflicts and that adequate controls exist for monitoring fee accuracy and issuing refunds;
Review Form ADV Items 10 and 12 to confirm that financial industry affiliations, brokerage practices, and compensation arrangements are disclosed completely and consistently; and
Review advisory agreement provisions to ensure that liability disclaimers, hedge clauses, and assignment provisions are consistent with fiduciary obligations.

CONCLUSION

The convergence of the Division of Examination’s Risk Alert and the Division of Enforcement’s recent actions makes clear that the SEC is scrutinizing investment adviser conflicts of interest. Investment advisers that fail to address these issues could face monetary penalties, censures, and cease-and-desist orders. Advisers that proactively review and strengthen their disclosures, fee-billing practices, valuation procedures, and compliance programs will be better positioned to withstand regulatory scrutiny. Sher Tremonte LLP will continue to monitor developments. For questions, please contact us. Written by Tami Stark and Rebecca Prager.