Economic Conflicts of Interest Remain a Focus of SEC Examinations

On June 9, 2026, the U.S. Securities and Exchange Commission’s Division of Examination (the “Division”) issued a Risk Alert summarizing examination findings on investment advisers’ economic conflicts of interest. The Risk Alert indicates that economic incentives may influence advisers’ recommendations regarding products, services, custodians, portfolios, and fee arrangements, and identifies recurring deficiencies in disclosures, billing practices, and compliance programs. The Risk Alert illustrates the Division’s continued focus on whether advisers provide full and fair disclosure of material conflicts, and maintain compliance programs reasonably designed to identify, mitigate, and address such conflicts.

Division’s Observations from Examination of Investment Advisers

The Division’s review of adviser activities indicated that

• advisers had economic conflicts that were undisclosed or disclosed in a manner that was incomplete or misleading,
• advisers’ practices were inconsistent with their advisory agreements and disclosures, and
• compliance programs did not adequately address such conflicts. Key observations include:

Cash Management Recommendations:

Some advisers receive revenue when clients’ uninvested cash is automatically moved into interest bearing accounts (“cash management recommendations”). There is an economic conflict of interest when advisers receive revenue in exchange for cash management recommendations. The Division observed that some advisers failed to provide full and fair disclosure of economic conflicts associated with cash management recommendations. The Division identified inadequate disclosure where advisers received revenue-sharing payments from custodians, clearing firms, or third-party bank sweep programs based on client cash balances, and where advisers failed to disclose incentives to recommend cash management options that generated higher compensation. The Division also noted instances where advisers used misleading disclosure language, stating they “may” receive revenue from third-party bank deposit sweep programs when such revenue was in fact received.

Money Market Fund & Mutual Fund Share Class Selection:

The Division observed instances where advisers did not make full and fair disclosure regarding the economic benefits advisers receive for their money market fund & mutual fund share class selection. For example, advisers failed to disclose economic benefits associated with money market fund & mutual fund share class selection recommendations, including the availability of lower-cost share classes. If lower-cost share classes are available, advisers should be able to support the basis for recommending a higher-cost option.

Other Economic Benefits:

The Division observed instances in which advisers failed to provide full and fair disclosure of the economic benefits received in connection with recommendations regarding custodial credits, margin loans and credits, and transaction markup fees.

Form ADV Disclosures:

The Division observed instances where advisers provided incomplete or inaccurate Form ADV disclosures regarding economic conflicts of interest. For example, the Division found that Adviser did not fully disclosure financial industry activities and affiliations in ADV Part 2A Item 10, and broker-dealer revenue sharing arrangement in ADV Part 2A Item 12.  Form ADV disclosures should provide an accurate and complete description of advisers’ compensation arrangements, affiliations, and related economic conflicts of interest.

Fee Billing Practices:

The Division observed instances where advisers charged fees that were inconsistent with advisers’ agreement and disclosures. The Division’s identified findings in three categories:

• fee calculation errors,
• fees charged for services not provided, and
• failure to refund unearned prepaid fees.

Examples of fee calculation errors include applying incorrect fee rates, billing on excluded assets, and not providing certain transaction fee rebates (ex: mutual fund transaction fees). Examples of billing for services not provided include continuing to charge fees after the departure of advisory personnel without account reassignment, billing on inactive accounts, assessing duplicative fees after internal account transfers.

Compliance Program:

Rule 206(4)-7 (the “Compliance Rule”) requires that Advisers implement written policies and procedures reasonably designed to prevent violations of the Advisers Act. The Division observed instances in which the compliance program did not address all billing methodologies in use, and did not include procedures to verify fee calculation accuracy or ensure that terminated accounts were no longer charged.

Takeaways for Investment Advisers

The Risk Alert indicates that the Division continues to focus on economic conflicts, disclosure adequacy, and fee-billing accuracy. The Division’s findings often have led to advisers returning money owed to clients due to fee billing and calculation errors.  Advisers are encouraged to:

• Review and update, as appropriate, billing policies, procedures, and practices to ensure accuracy and consistency with disclosures and agreements
• Perform fee testing that reconciles fee calculations against executed advisory agreements
• Identify and timely address new conflicts of interest
• Review disclosures regarding economic conflicts of interest to ensure that clients are provided with full and fair disclosure

Stark & Stark attorneys remain available to assist in assessing how the Division’s observations apply to your compliance program.