SEC Risk Alert Puts Adviser Economic Conflicts Front and Center

The Security and Exchange Commission’s (SEC) Division of Examinations issued a Risk Alert June 9, 2026. It’s titled Examination Observations of Investment Adviser Obligations Related to Economic Conflicts of Interest. The Risk Alert does not create new rules, but it does provide a clear examination roadmap for SEC-registered investment advisers. It identifies recurring deficiencies involving:

• Cash sweep and cash management programs
• Revenue sharing
• Money market and mutual fund share class selection
• Margin and custodial credits
• Advisory fee calculations
• Refund practices
• Policies and procedures addressing fee-related conflicts.

The message for investment directors, chief compliance officers and senior management is direct: high-level conflict disclosure is not enough. Advisers should identify actual economic incentives, make specific and understandable disclosures, conform billing practices to advisory agreements and Form ADV, test the accuracy of fees and rebates, and maintain documentation showing that the compliance program is reasonably designed for the firm’s business model.

Key SEC Risk Alert Takeaways for Investment Advisers

• Cash sweep revenue, custodial credits, margin benefits, revenue sharing and similar compensation arrangements should be treated as potential economic conflicts.
• Disclosure that an adviser “may” receive compensation can be misleading when the adviser already receives that compensation.
• Form ADV, advisory agreements, fee schedules, billing systems and compliance procedures should be reconciled against actual business practices.
• Fee billing should be tested for cash balances, excluded assets, householding, prorations, breakpoints, refunds, rebates, inactive accounts and terminated accounts.
• Compliance programs should include periodic testing, escalation, remediation and documentation—not merely written policies.

Why the SEC Economic Conflicts Risk Alert Matters for Advisers

Economic conflicts are not limited to headline-grabbing proprietary product cases. The Risk Alert focuses on everyday advisory practices that are now examination staples: uninvested cash, sweep programs, revenue sharing, share class selection, advisory fee billing, prorations, householding, refunds, rebates, inactive accounts, and inconsistencies among Form ADV, advisory agreements, fee schedules, and compliance procedures.

For chief compliance officers and senior management, the Risk Alert supplies a useful diagnostic framework. Examiners will not merely ask whether a conflict is mentioned somewhere in Form ADV. They will examine whether the firm understands the economic incentive, whether the disclosure is accurate for the practice as actually implemented, whether clients were charged consistently with the contract and the disclosure, and whether compliance personnel tested the relevant calculations and controls.

Core SEC Examination Themes for Economic Conflicts of Interest

1. Cash Management and Sweep Program Conflicts

The Division observed advisers recommending programs in which clients’ uninvested cash was automatically moved into interest-bearing accounts, including programs held at affiliates. Where advisers received revenue or other benefits from these arrangements, the staff viewed the arrangement as an economic conflict requiring specific disclosure and informed consent. The most significant observations involved undisclosed revenue from custodians, incentives to recommend sweep vehicles that generated higher adviser compensation, and disclosure language suggesting that revenue was merely possible when it was in fact being received.

The Risk Alert is particularly important for advisers using third-party bank deposit sweep programs, affiliated cash programs, or money market sweep options. Advisers should confirm whether they or their affiliates receive any spread, revenue share, mark-up, credit, service fee, or other economic benefit based on client cash balances. Where such benefits exist, disclosures should identify the benefit and explain how it may affect recommendations or default cash management settings.

2. Why “May” Disclosure Can Be Misleading for Existing Conflicts

The Division again highlighted the inadequacy of hypothetical disclosure where a conflict actually exists. In the cash sweep context, the staff observed advisers that received revenue from client cash balances but disclosed only that they “may” receive such revenue. This is a familiar Commission position, and it is consistent with the 2019 fiduciary interpretation: conditional disclosure can be misleading when it obscures an actual, existing conflict.1

Firms should review Form ADV Part 2A, Form CRS, client agreements, cash sweep disclosures, referral disclosures, and private fund documents for language that describes existing compensation arrangements as merely possible. The key drafting question is whether a reasonable client can understand the actual economic incentive, its source, its magnitude or method of calculation where material, and the manner in which it could affect the advice.

3. Advisory Fees on Cash Balances and Negative Return Risk

The Risk Alert notes that some advisers failed to disclose that client cash balances were included in asset-based advisory fee calculations, or failed to explain the impact of those fees on returns. This is a material issue, particularly where cash yields are low, spreads are retained by intermediaries, or advisory fees can cause client cash positions to experience minimal or negative net returns.

Advisers should evaluate whether advisory fees are charged on cash, whether different fee rates apply to cash or fixed income, whether fee schedules are consistent across documents, and whether disclosures explain the economic effect of charging advisory fees on cash balances. The issue is not limited to operational accuracy; it also implicates fiduciary disclosure and informed consent.

4. Share Class Selection, 12b-1 Fees and Revenue Sharing

The Division observed conflicts involving money market fund and mutual fund share class selection where higher-cost share classes generated economic benefits for advisers, broker-dealer affiliates, related entities, or individual representatives. The staff specifically identified situations where lower-cost share classes were available but advisers failed to disclose that the selected share classes generated revenue sharing or Rule 12b-1 fees.

This area remains a perennial examination and enforcement risk. Advisers should verify that their surveillance identifies available lower-cost share classes, that share class selection is reviewed periodically, that any retained 12b-1 fees or revenue sharing are accurately disclosed, and that remediation and reimbursement processes exist when clients are placed in higher-cost classes without adequate justification and disclosure.

5. Custodial Credits, Margin, Markups and Clearing Arrangement Conflicts

The Risk Alert extends beyond traditional share class issues. The staff observed failures to disclose benefits associated with custodial credits, margin loans and credits, transaction markup fees, clearing relationships, termination fees, and additional fees imposed by advisers that were not charged by clearing broker-dealers. These observations are significant because many firms treat such arrangements as operational or platform matters rather than as conflicts requiring fiduciary analysis.

The better approach is to treat every third-party economic benefit as a potential conflict until analyzed. That includes indirect benefits to affiliates, credits that offset firm expenses, preferential arrangements with custodians or clearing firms, and platform economics that may influence recommendations, account placement, or client communications.

Form ADV Disclosure Controls for Adviser Economic Conflicts

The Risk Alert specifically addresses Form ADV Part 2A. The staff identified omissions and inconsistencies under Item 10, which requires disclosure of financial industry activities and affiliations, and Item 12, which addresses brokerage practices, broker selection, and related compensation considerations.2 The cited deficiencies included incomplete disclosure of affiliate compensation arrangements and incomplete disclosure of revenue sharing with clearing agencies.

From a governance perspective, firms should not treat the annual Form ADV update as a word-processing exercise. The annual amendment should include a conflicts-focused review in which legal, compliance, finance, operations, portfolio management, and business leadership confirm that each revenue stream, affiliate relationship, fee practice, and platform arrangement is accurately described.

Advisory Fee Billing, Agreements and Operational Controls

A major portion of the Risk Alert concerns fee calculations that deviated from advisory agreements, disclosures, or both. The staff identified proration practices not described in agreements or disclosures, asset-based fees charged on holdings that should have been excluded from billing calculations, incorrect fee rates, failures to apply reduced rates or householding breakpoints, failures to classify fixed income assets properly, and failures to rebate transaction fees where agreements stated that clients would not incur such fees.

The Risk Alert also identifies unearned or duplicative fees, including fees for services not provided, fees charged to inactive accounts, fees charged after clients requested account closure, duplicative billing following internal asset transfers, and failures to refund prepaid advisory fees after termination. These examples confirm that fee billing is now examined as a combined fiduciary, disclosure, contractual, books-and-records, and compliance program issue.

Investment Adviser Compliance Program Expectations

The Division observed policies and procedures that did not adequately address billing arrangements such as prepaid fees, fee reductions, householding, and margin on client accounts. The staff also observed documents containing conflicting information regarding fee withdrawal authority, fee schedules or narratives that were internally inconsistent, and disclosures that were overly complicated or difficult to reconcile.

The Risk Alert concludes by encouraging advisers to review billing policies, procedures, and practices on a “routine review” basis and to ensure that practices are “accurate and consistent” with disclosures and agreements.3 That formulation is important. It places the emphasis not merely on having procedures, but on periodic testing, reconciliation, escalation, and remediation.

What SEC Examiners May Request from Investment Advisers

Based on the Risk Alert, advisers should expect examination staff to request documents and data sufficient to test both disclosure and implementation. Likely requests include:

• Current and historical Form ADV Part 2A brochures, Form CRS, advisory agreements, fee schedules, and client-facing cash sweep disclosures.
• Revenue sharing agreements, custodial agreements, clearing agreements, margin-related arrangements, cash sweep agreements, and affiliate compensation arrangements.
• Lists of clients in cash sweep programs, money market funds, mutual fund share classes, margin programs, and accounts subject to reduced fee schedules or householding.
• Fee billing files, calculation methodologies, exception reports, rebate and refund logs, and records supporting prorations, breakpoints, and asset classifications.
• Policies and procedures addressing billing, cash management, share class selection, revenue sharing, conflicts identification, disclosure review, and annual compliance testing.
• Compliance testing results, internal audits, remediation records, client reimbursements, and committee minutes or management reports addressing economic conflicts.

Recommended Action Steps for Investment Adviser Compliance Teams

1. Update the conflicts inventory. Identify actual and potential economic benefits arising from client cash, sweep programs, affiliates, custodians, clearing firms, margin, share classes, revenue sharing, markups, credits, referral arrangements, and service providers.
2. Map each economic benefit to disclosure. Confirm where the conflict is disclosed, whether the disclosure is specific, whether conditional language is used appropriately, and whether the disclosure reflects current practice.
3. Reconcile Form ADV, agreements, fee schedules, procedures, and billing systems. Inconsistencies across documents are a central examination risk.
4. Test fee calculations. Include sampling for cash, fixed income, excluded assets, householding, breakpoints, prorations, prepaid fees, terminated accounts, inactive accounts, rebates, refunds, and duplicative billing.
5. Review cash management practices. Determine whether clients are charged advisory fees on cash, whether the firm or its affiliates receive sweep revenue, and whether clients understand the economic impact.
6. Assess share class selection. Identify lower-cost alternatives, retained 12b-1 fees, revenue sharing, and procedures for conversion, reimbursement, or documentation of exceptions.
7. Enhance governance. Report material conflicts, testing results, exceptions, and remediation to senior management or the compliance committee.
8. Document remediation. Where errors are identified, preserve records of root-cause analysis, client impact, reimbursement calculations, corrective action, and disclosure updates.

Practice Point: Treat the SEC Risk Alert as an Examination Checklist

Advisers should treat this Risk Alert as a practical examination checklist. The firms most exposed are not necessarily those with unusual products, but those with ordinary compensation arrangements that have never been translated into clear disclosures, accurate billing logic, and testable controls. CCOs should prioritize conflicts that combine three features: an economic benefit to the adviser or an affiliate, client-facing disclosure that is conditional or generic, and limited testing of actual billing or recommendation practices.

Conclusion: Strengthening Economic Conflict Disclosures and Controls

The Division’s observations reinforce the Commission’s long-standing view that economic conflicts sit at the center of the adviser’s fiduciary duty. The Risk Alert is particularly useful because it ties fiduciary disclosure principles to operational areas that examiners can test with data: cash balances, fee calculations, account status, refund practices, share classes, and third-party compensation.

Firms should move promptly to evaluate whether their disclosures, agreements, billing practices, and compliance procedures operate as an integrated control framework. Advisers that can demonstrate a disciplined process for identifying, disclosing, mitigating, testing, and documenting economic conflicts will be better positioned in examinations—and less likely to face deficiency findings or enforcement referrals.

Footnotes:
1 See Fiduciary Interpretation, supra note 2 (disclosure that an adviser “may” have a conflict is not adequate when the conflict actually exists).
2 Form ADV, Part 2A, Items 10, 12.
3 Risk Alert, supra note 1, at 6.

About Robert Moreiro

Robert Moreiro is a financial services attorney with more than 20 years of experience advising registered investment advisers, broker-dealers, and associated persons on securities regulation, compliance, and enforcement matters. He counsels clients on SEC, FINRA, state registration, compliance policies, CCO matters, and regulatory examinations and investigations. Robert has served as an expert witness in FINRA arbitration, is recognized in the 2025 and 2026 editions of The Best Lawyers in America for Securities Regulation, and holds the Investment Adviser Certified Compliance Professional and Certified Securities Compliance Professional designations.

Practus, LLP provides this information as a service to clients and others for educational purposes only. It should not be construed or relied on as legal advice or to create an attorney-client relationship. Readers should not act upon this information without seeking advice from professional advisers.