A Recent SEC Risk Alert Provides Roadmap to Common Examination Deficiencies

The SEC Division of Examinations issued a Risk Alert on June 9, 2026, addressing examination observations involving investment adviser economic conflicts of interest.

The Risk Alert focuses on economic incentives advisers and their financial professionals may have when recommending products, services, account types, cash management programs, custodial arrangements, or fee structures. The SEC noted that examination staff observed conflicts that were undisclosed, incompletely disclosed, or described in a manner that may have been misleading. Staff also observed adviser practices that were inconsistent with advisory agreements or Form ADV disclosures.

Cash Management and Sweep Program Conflicts

The Risk Alert includes detailed observations regarding cash management and sweep programs. These observations appear most directly relevant to advisers with affiliated broker-dealers, affiliated banks, affiliated cash management programs, dual registrant structures, or revenue-sharing arrangements with custodians, sweep providers, or money market fund providers.

The SEC observed advisers recommending cash management programs where client cash was automatically moved into interest-bearing accounts, including arrangements involving affiliated parties. In some cases, advisers, affiliates, or related financial professionals received compensation or other economic benefits from client cash balances held at custodians or through third-party bank deposit sweep programs.

The SEC also noted disclosure issues in which firms stated that they “may" receive revenue from these arrangements when the firm or an affiliate actually received the revenue. As the SEC staff has previously cautioned, disclosure should not be a “check-the-box” exercise. If a firm or its affiliate receives compensation from an arrangement, the conflict should be disclosed as an existing conflict rather than presented as a hypothetical possibility.

Simply put, either the conflict exists, or it does not. There is no "may."

For standalone advisory firms that do not receive sweep revenue, are not affiliated with a broker-dealer or bank, and do not receive compensation tied to client cash balances, this portion of the Risk Alert may have more limited direct application. However, the findings still provide useful guidance regarding how advisers describe and bill on client cash and the use of the word "may" in your disclosures.

The SEC also observed instances in which advisers did not fully disclose that certain client cash balances were included among assets subject to advisory fees. This issue can apply more broadly, including to advisers that bill on total assets under management and include cash or cash equivalents in the advisory fee calculation.

For many advisory firms, the relevant takeaway is that disclosures, advisory agreements, and billing practices should be consistent regarding whether cash is included in billable assets, whether any reduced fee applies to cash or fixed-income positions, and whether cash management is part of the advisory service. Where client cash is held for investment, liquidity, trading, allocation, risk management, or client-directed purposes, the firm’s treatment of that cash should be accurately reflected in its disclosures and fee billing practices.

Money Market and Mutual Fund Share Class Conflicts

The SEC also identified examination findings related to money market funds and mutual fund share-class recommendations. Staff observed advisers recommending higher-cost money market fund share classes when lower-cost share classes were available and when the higher-cost share classes generated revenue sharing or other compensation for the adviser or an affiliate.

The Risk Alert also discusses mutual fund share class selection involving 12b-1 fees. In some instances, clients were invested in mutual fund share classes that paid 12b-1 fees to the adviser, a related entity, or individual adviser representatives who were also registered representatives of a broker-dealer, even though lower-cost share classes of the same fund were available.

This is not a new area of SEC focus. Mutual fund share class selection has been an examination and enforcement priority for many years, including the SEC’s 2018 Share Class Selection Disclosure Initiative. That initiative focused on advisers who placed clients in higher-cost mutual fund share classes that paid 12b-1 fees when lower-cost share classes of the same fund were available, and the related conflicts were not adequately disclosed.

The current Risk Alert continues the SEC’s focus on whether advisers fully and fairly disclose economic incentives associated with share class recommendations, including any compensation, revenue sharing, or other financial benefits received by the adviser or related parties.

For advisers that do not receive 12b-1 fees, revenue sharing, or other fund-related compensation, the economic conflict described in this portion of the Risk Alert may be less directly applicable. However, share class selection can still raise fiduciary duty concerns. Even where the adviser receives no compensation from the fund or share class, the adviser should consider whether the client is being placed in an appropriate share class based on cost, availability, eligibility requirements, transaction fees, platform limitations, and the client's overall circumstances.

The SEC’s observations serve as a reminder that advisers should understand the share classes available to their clients and be prepared to demonstrate that share class selections are consistent with both the firm's fiduciary obligations and its disclosures.

Form ADV Disclosure Issues

The SEC specifically highlighted issues with Form ADV disclosures, including disclosures that did not accurately describe the adviser’s actual business practices, affiliations, compensation arrangements, or related conflicts.

Under Item 10, Other Financial Industry Activities and Affiliations, staff observed advisers who did not fully disclose affiliated financial industry relationships or compensation arrangements involving related parties. These included situations where an adviser, affiliate, or related financial professional received compensation or other economic benefits from cash sweep programs, money market funds, mutual funds, margin lending, custodial arrangements, clearing relationships, or other financial services arrangements.

Under Item 12, Brokerage Practices, staff observed incomplete or inconsistent disclosures regarding the adviser’s selection or recommendation of broker-dealers, custodians, and clearing firms. The missing or incomplete disclosures included revenue-sharing arrangements, custodial credits, transaction markups, interest rate markups on margin loans, termination fees, and other economic benefits received by the adviser, an affiliate, or related parties.

The issue was not simply that the disclosures were missing. In some cases, disclosures were too general, inconsistent with the firm’s actual practices, or described existing conflicts as hypothetical. These deficiencies may prevent clients from understanding whether the adviser or a related party has a financial incentive when recommending a custodian, broker-dealer, cash management program, sweep option, money market fund, mutual fund share class, or other arrangement.

Fee Billing and Calculation Issues

The Risk Alert also includes detailed observations involving advisory fee billing. SEC staff observed advisers charging fees that were inconsistent with advisory agreements, disclosures, or both.

Examples included prorating advisory fees for deposits or withdrawals even though the advisory agreement or disclosure did not address prorating, charging advisory fees on assets that were excluded from billing under the advisory agreement, applying incorrect fee rates, failing to apply reduced rates for cash or fixed income assets, failing to household accounts for breakpoint purposes, failing to identify fixed income mutual funds as fixed income assets when those assets were eligible for a lower fee rate, and failing to rebate transaction fees where the advisory agreement stated that clients would not incur those charges.

The SEC also observed advisers charging fees for services that were not provided. Examples included accounts that were not reassigned after advisory personnel left the firm, inactive accounts that received no supervisory or management services, accounts that remained open after clients requested closure, and duplicative billing resulting from internal asset transfers.

The Risk Alert also noted instances in which advisers billed fees in advance but did not refund unearned fees when clients terminated their advisory agreements before the end of the billing period.

This portion of the Risk Alert may be particularly useful for firms conducting periodic fee billing reviews and lookback testing of advisory fees. Fee-related findings are common in examinations, and the SEC’s observations provide practical examples of the types of fee-calculation errors, billing inconsistencies, disclosure issues, refund deficiencies, and control weaknesses that exam staff continue to identify. Taking the time to compare the firm’s fee billing practices, advisory agreements, and disclosures against these observations may help the firm identify and address issues before they become examination deficiencies.

Compliance Program Observations

The SEC also noted compliance program deficiencies. Staff observed policies and procedures that did not fully address the adviser’s actual billing arrangements, including prepaid fees, fee reductions, householding, and margin.

Staff also observed inconsistencies among policies and procedures, client agreements, and disclosures. In some cases, disclosures were overly complicated or difficult to reconcile with other firm documents.

The SEC further noted that some advisers lacked controls to monitor fee calculations, identify manual input errors, verify rebates and refunds, and confirm that terminated clients were no longer being billed.

The Risk Alert is significant because it provides a detailed summary of the types of economic conflicts and fee-related deficiencies SEC examiners continue to identify. The SEC also stated that these findings often led advisers to return money to clients due to errors in fee billing and calculation.

Although the Risk Alert does not create new requirements, it reinforces that economic conflicts, compensation arrangements, cash sweep programs, share class selection, Form ADV disclosures, and fee billing practices remain areas of continued focus for examination.

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