Recently, the Securities and Exchange Commission (SEC) Division of Examinations published its second risk alert (Risk Alert) since Paul Atkins became chair. The SEC staff uses risk alerts to provide information to investment advisers on SEC staff observations from exams to assist them in developing their own compliance programmes.

This Risk Alert focuses on investment adviser fiduciary obligations with respect to economic conflicts of interest that might influence advisers and their financial professionals to recommend certain products, services, or account types to their clients. Citing the SEC’s fiduciary interpretation from 2019 and longstanding examination priorities, the Risk Alert identifies several specific observations arising from SEC examinations, many of which are summarised below.

The staff made the following observations:

Cash management programmes

The staff noted that some investment advisers recommended cash sweep programmes to their clients, including those offered by affiliated banks, without disclosing revenue received in connection with those recommendations, such as revenue sharing tied to client cash balances in bank deposit sweep programmes or incentives to recommend higher cost (or lower interest) sweep vehicles. The staff also noted that some advisers also failed to disclose that swept cash was subject to their asset-based advisory fees, including where clients earned negative returns on cash after fees and expenses.

The staff also took issue with certain adviser disclosures, noting that some advisers disclosed that they “may” receive revenue from third-party bank sweep programmes when they in fact did receive it. Under the 2019 fiduciary interpretation, stating that an adviser “may” have a conflict is inadequate when the conflict actually exists; the use of “may” is appropriate only for potential conflicts that do not yet exist but might reasonably arise.

Share class selection

The staff also found that some advisers failed to disclose that lower cost share classes of the same funds were available to clients, while recommending higher cost classes that generated revenue for the advisers or affiliated brokers. This issue appeared in both the cash context, where some advisers’ only cash management recommendations were higher-cost money market funds that shared revenue with the adviser, and where advisers selected mutual fund share classes that paid ongoing Rule 12b-1 fees to dually registered advisers, affiliated broker-dealers, or individual representatives, even though a lower-cost class of the same fund was available.

Disclosure of other economic benefits

The staff further noted that some adviser don’t adequately disclose (in Form ADV or otherwise) economic benefits available to them from custodial credits, margin loans and credits, and marking up fees charged by clearing brokers. The staff specifically cited insufficient disclosures relating to broker-dealer affiliates who received revenue from interest rate markups on margin loans made by advisory clients, or where advisers received credits for maintaining custodial and clearing relationships (and faced termination fees if they exited those relationships). The staff also addressed disclosures in Items 10 and 12 of Form ADV Part 2A, the narrative brochure delivered to clients, observing that some advisers lacked sufficient disclosures regarding material compensation arrangements with affiliates and factors considered in selecting broker-dealers (e.g., revenue share).

Fee billing errors

The staff observed that some advisers charged higher fees than agreed to for services that were provided. For example, some advisers charged asset-based fees on excluded assets (assets that were not subject to fees), assessed incorrect fee rates or did not apply reduced asset-based fee rates for cash and fixed income assets, or did not rebate certain transaction fees. Some advisers had prorated fees for large mid-month deposits, which conflicted with their disclosures that fees were based on beginning-of-month balances. The staff also found that some advisers billed accounts that received no services, including charging fees on accounts where representatives departed and the accounts were not reassigned to remaining advisory personnel; billed inactive accounts that predominantly held cash and remained open even after clients had asked in writing to close; and failed to refund prepaid fees when clients terminated mid-period.

Compliance programme deficiencies

SEC-registered investment advisers are required to have policies and procedures reasonably designed to prevent violations of the Investment Advisers Act of 1940 and the rules adopted thereunder, tailored to the firms’ operations. In examining some advisers, the staff found policies that did not address billing arrangements the firms actually used, such as prepaid fees, householding, and margin; compliance documents, disclosures, and client agreements containing conflicting fee information; and no controls to test fee calculations for errors or to confirm that terminated accounts stopped being billed and refunds went out.

Looking ahead

The Risk Alert follows several enforcement actions against investment advisers involving economic conflicts of interest and fee billing practices, and it is consistent with our observation and experience that conflicts of interest will continue to remain an exam priority in 2026. The staff encouraged advisers to review their billing policies, procedures, and practices routinely, to identify and address new conflicts of interest as they arise, and to confirm that disclosures give clients full and fair notice of the advisers’ economic conflicts and noted that examination findings often led to advisers returning money owed to clients and improving their disclosures and billing practices. We believe this Risk Alert can serve as an inflection point for investment adviser to review their own economic conflicts of interest and fee billing practices to confirm that the items addressed by the staff in the Risk Alert are not present at their firm.