backOn June 9, 2026, the SEC Division of Examinations (the “Division”) published a Risk Alert identifying compliance deficiencies related to the obligations of SEC-registered investment advisers (“advisers”) to address economic conflicts of interest with their clients. As fiduciaries, advisers are obligated to either eliminate or fully and fairly disclose all conflicts of interest that might incline the adviser to render advice that is not disinterested.
Key Takeaways:
While this Risk Alert does not establish any new legal obligations for advisers or modify their existing obligations, it signals the Division’s ongoing examination priorities and expectations regarding advisers’ obligations to address economic conflicts of interest. Examination findings in this area have led to advisers returning money owed to clients due to fee billing and calculation errors, improving the clarity of their disclosures, and strengthening the effectiveness of their compliance programs. Accordingly, the Risk Alert serves as a timely reminder for advisers that they should routinely conduct internal reviews of their disclosure practices, fee billing procedures, and compliance programs, including:
- reviewing all economic conflicts of interest and ensure they are fully and fairly disclosed so that clients can provide informed consent;
- confirming that fee calculations and billing practices align with Form ADV disclosures and signed advisory agreements;
- evaluating compliance policies and procedures to ensure they adequately address economic conflicts of interest and include appropriate controls; and
- ensuring unearned fees are promptly refunded to clients.
The King & Spalding team would be glad to answer any questions about how these observations may affect your operations or compliance programs.
Examination Priorities and Regulatory Framework:
The Division prioritizes the review of economic incentives that advisers and their financial professionals may have to recommend certain investments, products, services, or account types—including the source and structure of compensation, revenue, or other economic benefits flowing to advisers and their related entities in connection with such recommendations.1See Division Examination Priorities from fiscal years 2021-2026 (identifying advisers’ economic incentives as a Division priority since 2021). The Division’s staff reviews whether advisers have: (1) adopted and implemented written policies and procedures reasonably designed to prevent violations of the Advisers Act of 1940 (the “Advisers Act”); (2) disclosed fees and expenses with sufficient clarity for clients to understand the costs and economic incentives related to their advisers’ recommendations and to provide informed consent to conflicts of interest; and (3) accurately calculated and charged clients advisory fees and expenses in accordance with client disclosures.
The Division’s Observations:
Insufficient Disclosure of Economic Conflicts of Interest
The Division observed advisers that did not make full and fair disclosure of certain fees and other revenues that advisers and their affiliates stood to receive from investments, products and accounts that they recommended to their clients. The Division cited specific examples and observations across several categories, including:
- Cash management recommendations: Advisers recommended programs where clients’ uninvested cash was moved into interest-bearing accounts, some held at affiliated parties, and the advisers received revenue in exchange for these cash management recommendations. Deficiencies included omitting disclosures of revenue received from certain custodians based on client cash balances, failing to disclose incentives to recommend cash sweep vehicles that resulted in the greatest possible compensation to the adviser, and using the word “may” to suggest the adviser might receive revenue when such revenue was actually being received.
- Mutual fund share class selection: Advisers selected fund share classes that paid the adviser, its related entities, or its representatives fees pursuant to Rule 12b-1 when lower-cost share classes were available. Staff observed advisers that did not disclose that their recommendations were limited to higher-cost funds with revenue sharing arrangements, or that lower-cost alternatives existed.
- Other economic benefits: Advisers did not provide full and fair disclosure of economic benefits related to recommendations regarding custodial credits, margin loans and credits, and transaction markup fees—including failing to disclose that broker-dealer affiliates received revenue from margin loan interest rate markups, or that advisers marked up clearing brokers’ fees.
Form ADV Disclosure Deficiencies
The staff observed compensation-related misstatements or omissions in advisers’ brochures prepared pursuant to Part 2A of Form ADV. Under Item 10 (Other Financial Industry Activities and Affiliations), advisers omitted disclosures regarding material conflicts of interest created through compensation agreements with affiliates. Under Item 12 (factors considered in selecting or recommending broker-dealers), advisers made disclosures that were inconsistent with other disclosures or were incomplete—for instance, advisers with revenue sharing arrangements did not disclose all material facts regarding those relationships.
Fee Billing Practices Inconsistent with Agreements and Disclosures
The Division observed advisers assessing client advisory fees that were inconsistent with their agreements, disclosures, or both. Specific deficiencies include: prorating advisory fees when agreements and disclosures did not address proration; charging asset-based fees on holdings excluded from fee calculations; not applying reduced fee rates or householding breakpoints; not rebating transaction fees that agreements stated clients would not incur; charging fees for services not provided (including unearned advisory fees on inactive accounts) or at a higher rate than agreed to; duplicative billing resulting from internal asset transfers; and failing to refund prepaid fees upon client termination.
Compliance Program Deficiencies
The Division observed advisers that did not adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act consistent with their operations. Written policies did not indicate how advisers would execute their billing practices accurately and consistently with their fiduciary obligations, advisory agreements, and disclosures. Deficiencies include: not fully addressing all billing arrangements applicable to clients (such as prepaid fees, fee reductions, and margin); adopting compliance policies, disclosures, and client agreements that contained conflicting information regarding fees; using schedules or narratives that were internally inconsistent, overly complicated or difficult to reconcile with related disclosures; and lacking controls for monitoring accurate fee calculations, testing for calculation errors or applying rebates, resulting in client overcharges.