In June of 2026, the SEC issued a Risk Alert reminding investment advisers of their fiduciary duty to make disclosures that satisfy regulatory obligations on economic conflicts of interest. This area has been an exam priority since 2021, however, SEC Exam staff reiterated this, highlighting enhanced focus on areas where noteworthy gaps were found.
According to the Alert, when faced with an economic conflict of interest, advisers must either:
- Eliminate a conflict or
- Disclose it fully and fairly enough that clients can give informed consent.
Thorough and transparent disclosure of economic conflicts of interest is paramount to satisfying this fiduciary duty.
The client must be able to clearly understand the conflict from what is written. If the client cannot understand the disclosure, they cannot provide informed consent. This means that the disclosure was not adequate, and the IA did not meet their fiduciary duty to their client.
Findings from SEC Exam Staff
The examination division of the SEC found repeated violations in several areas where disclosure of economic conflicts of interest was lacking, including in areas like below.
Form ADV Part 2A: Recurring errors and gaps in items 10 and 12, including incomplete disclosures of compensation arrangements.
Billing and Fee Calculations: Billing errors, fees inconsistent with client agreement, failing to rebate on promised fees, and more.
Compliance Programs: Lack of written policies and procedures, P&Ps that do not align with the firm’s operations, and most importantly, inconsistencies between policies, actions and fees charged.
Cash Management Programs: Moving client accounts into interest-bearing sweep vehicles, sometimes with affiliates, without disclosing revenue received.
Application of “May” to Existing Conflicts of Interest: The use of vague or non-committal words such as “may” in disclosures for existing conflicts, such as disclosing that a sweep vehicle “may receive revenue,” when the sweep vehicle has already received revenue. The SEC is clear that vague description words can only be used for potential future conflicts of interest and not for actions already taken.
Share Class Selection: Higher-cost share class selection when lower-cost options are available for the same fund, without adequate disclosure on why, or disclosure of revenue generated from the higher-cost selection.
What This Means for Advisers
The Alert is a reminder that the SEC will be looking at IAs’ application of Advisers Act Section 206 and highlighting areas of concern, especially in economic conflicts of interest.
Now is a good time for advisers, particularly smaller and mid-size firms without large compliance teams, to run a self-audit to check for any conflicts that exist, and/or conflicts that are not adequately disclosed to the client.
Key Steps:
- Audit cash sweep and money market fund arrangements for revenue sharing and confirm disclosures use precise, transparent language reflecting conflicts.
- Review client disclosure documents, including Forms ADV, Contracts and Marketing materials for areas that require additional conflict language and avoid the use of the word “may” when discussing existing conflicts.
- Cross-check Form ADV Items 10 and 12 against actual compensation arrangements and other client-facing disclosures for consistency.
- Test fee billing against the actual advisory agreement to ensure that clients were not overbilled, taking remedial action if necessary to rebate fees.
- Confirm compliance policies address share class selections including how the firm is disclosing the selection of higher-cost share classes when lower-cost options are available.
For assistance with reviewing these areas and updating policies and procedures, actual internal protocols and disclosure practices, please contact us at 619.298.2880 or email [email protected].
