What Happened
On June 9, the SEC's Division of Examinations published a risk alert that changes the compliance landscape for investment advisers. The alert highlights five recurring deficiency patterns centered on economic conflicts of interest. The main issue: advisers are using vague language in their disclosures instead of clearly stating how they earn revenue and bill fees.
The Division clarified that saying "may receive compensation" when you do receive compensation no longer meets your fiduciary duty under Section 206 of the Investment Advisers Act of 1940. Examiners are now comparing Form ADV disclosures with actual billing records, revenue arrangements, and client account data. Discrepancies lead to flagged deficiencies.
Timeline
The June 9 alert coincides with the Division of Examination's 2026 examination priorities, which focus on advisers' financial conflicts and their impact on client advice. These publications indicate that economic incentives and compensation structures will be a focus for future examinations.
The alert is based on deficiencies repeatedly found in examinations, showing these patterns have been building for some time. Advisers who haven't aligned their disclosures with actual practices now face documented exposure.
Which Controls Failed or Were Missing
The risk alert identifies five specific control failures:
Cash sweep disclosure gaps. Advisers recommended cash sweep vehicles that generated revenue for the firm or its affiliates but used hypothetical language in disclosures. Examiners found compensation tied to client cash balances, incentives for higher-revenue options, and disclosures that didn't quantify the effect of fees on investor returns.
Share class selection conflicts. Advisers chose mutual fund share classes that paid 12b-1 fees or revenue sharing when lower-cost classes were available. Staff also noted undisclosed benefits from custodial credits, margin loans, and transaction markups.
Form ADV inconsistencies. Filings had vague or incomplete disclosures about financial industry affiliations (Item 7 in Part 1A and Item 10 in Part 2A) and broker-dealer selection and compensation practices (Item 12). These gaps obscured the full scope of the adviser's economic incentives.
Fee billing errors. Examiners found systemic billing issues that deviated from advisory agreements, including improper proration, billing on excluded asset types, charging for services no longer provided, double-billing, and not refunding prepaid fees after termination.
Compliance program deficiencies. Programs lacked specificity to address all active billing arrangements, didn't clearly describe fee-related practices, and failed to adequately describe ongoing monitoring and testing to ensure accurate billing.
Each failure stems from disclosures not matching actual operations.
What the Relevant Standard Requires
Section 206 of the Investment Advisers Act requires advisers to uphold a duty of loyalty and care to clients. The Division of Examinations bases the alert on a principle from SEC v. Capital Gains Research Bureau, Inc.: advisers must eliminate or fully and fairly disclose all conflicts that might bias their advice.
The SEC's 2019 interpretation of the standard of conduct clarifies that disclosure alone doesn't resolve a conflict. If you can't fully and fairly disclose a conflict for informed client consent, you must eliminate or mitigate it.
Rule 206(4)-7 under the Advisers Act requires registered advisers to adopt and implement written policies and procedures to prevent violations and review them annually for adequacy and effectiveness. Compliance programs must address each active billing arrangement and conflict, describing how you monitor and test them.
The standard is clear: your Form ADV, advisory agreements, and actual billing practices must align. Boilerplate qualifiers create regulatory exposure.
Lessons and Action Items for Your Team
Reconcile your disclosures with actual practice immediately. Review your Form ADV Part 2A, advisory agreements, and client-facing materials. Compare them line-by-line with how you actually bill fees and earn revenue. Replace "may" language with specific statements where conflicts exist. If you receive revenue sharing from a cash sweep program, state it. If you select share classes that pay you 12b-1 fees, disclose the dollar impact.
Treat fee billing as a control function. Test your proration methods, excluded asset types, terminated-account procedures, and management fee offsets against the governing agreements. Document the testing. Given that billing errors have led to enforcement actions, evidence of diligence serves as both a compliance safeguard and a defense.
Audit your compliance program for specificity. Your written policies and procedures must address each active billing arrangement and conflict. They must describe how you monitor and test them. Generic language about "monitoring conflicts" won't hold up in an examination when staff review your billing records and find systematic overcharges or undisclosed revenue streams.
Scrutinize affiliate arrangements and cash management programs. Where an affiliate earns revenue on client cash or where share class selection benefits you, ensure the conflict is disclosed specifically enough for informed consent. Evaluate whether mitigation or elimination of the conflict is more prudent. If you can't explain the arrangement clearly for client understanding and consent, you shouldn't offer it.
For private fund managers, harmonize your fund documents. Fee offsets, expense allocations, and affiliated service arrangements are key diligence topics for institutional investors. Disclosures that meet a limited partner's expectations should align with your Form ADV and your records. Inconsistencies between fund documents, side letters, and regulatory disclosures create examination and investor relations risks.
The Division of Examinations has outlined its focus. Your next examination will test whether your disclosures match your actual conduct. Close the gaps now.
