SEC Division of Examinations Issues Risk Alert on Investment Adviser Economic Conflicts of Interest

SEC Examinations Staff published a Risk Alert on June 9, 2026, titled "Examinations Observations of Investment Adviser Obligations Related to Economic Conflicts of Interest." This Risk Alert documents the SEC Staff’s findings related to investment adviser obligations around economic conflicts of interest. The Alert targets five specific categories of deficiency: undisclosed or misleading cash management disclosures, missing disclosures around other revenue opportunities, Form ADV gaps, fee billing practices inconsistent with advisory agreements, and compliance programs that do not address these issues adequately. This Alert identifies the specific failures driving those findings.

Fees and expenses have been on the SEC Staff's published examination priorities every year since 2022, but have always been a focus since mischarged or undisclosed fees direct affect investors. All of these deficiencies relate back to the fiduciary duty standard and an RIA’s fiduciary duty has been a standing examination focus for the same period.

The Fiduciary Obligation at the Center of This Alert

Investment advisers' status as fiduciaries requires them to either eliminate conflicts of interest or expose them through full and fair disclosure, so clients can understand the adviser's economic incentives, and clients can provide informed consent. The SEC Staff's examination program has prioritized this obligation since 2021, reviewing compensation structures, revenue-sharing arrangements, fee calculations, and the written policies that are supposed to govern all of them. The Risk Alert summarizes five years of exam all-to-common deficiencies.

What Examiners Found: Five Categories of Deficiency

1. Cash Management Recommendations
   • Advisers moving uninvested client cash into interest-bearing programs (including programs at affiliated custodians) frequently create undisclosed conflicts. Examiners found advisers that omitted disclosures about revenue received from custodians based on client cash balances, directed clients toward sweep vehicles that maximized the adviser's own compensation, and recommended money market fund share classes, without disclosing that lower-cost alternatives were available.
   • The SEC Staff was specific on one issue of language; that is the use if the word “may” in disclosure materials. For example, using "may receive" revenue or compensation in a disclosure document is not adequate when the adviser is, in fact, already receiving that revenue. That phrasing obscures an actual conflict rather than disclosing it. In instances where an adviser does not always receive compensation, firms should consider whether it is more likely than not that they will receive it. In such cases, the disclosure should specify when compensation is received. 
2. Mutual Fund Share Class Selection and Other Revenue Opportunities
   • Outside of the cash management context, the SEC Staff found advisers or affiliated broker-dealers receiving Rule 12b-1 fees from fund share classes when lower-cost alternatives were available to clients. Examiners also identified advisers that did not disclose custodial credits, interest rate markups applied to client margin loans, or transaction fees marked up beyond what the clearing broker charged. For dually registered firms, the affiliate relationship between the advisory firm and its broker-dealer created conflicts that advisers did not address in client-facing disclosures.
3. Form ADV Disclosure Gaps
   • The SEC Staff reviewed advisers' Form ADV brochures under Items 10 and 12. Under Item 10, advisers failed to disclose material conflicts created through compensation agreements with affiliated entities, including situations where the affiliated broker-dealer indirectly benefited from clearing arrangements. Under Item 12, disclosures about broker-dealer selection and compensation were either incomplete or inconsistent with other disclosures in the same document, preventing clients from forming an accurate picture of the adviser's economic incentives.
4. Fees Deviating from Advisory Agreements
   • Examiners found advisers charging fees that did not match the terms their clients had agreed to. The specific deficiencies included: applying incorrect fee rates rather than the tiered or reduced rates specified in agreements; charging fees on account holdings explicitly excluded from billing under the advisory agreement; charging advisory fees to accounts where services were no longer being delivered after responsible personnel departed; assessing fees on inactive accounts that had not received any management or supervisory services; duplicate billing resulting from internal account transfers; and failing to issue refunds to clients who terminated their agreements before the end of a pre-paid billing period.
5. Compliance Programs That Did Not Address Fee-Related Issues
   • The SEC Staff found advisers whose written policies and procedures did not describe how they would execute billing practices accurately or consistently. Compliance documents, client disclosures, and advisory agreements contained conflicting information on fees. Testing controls were absent, meaning no one within the firm was verifying that fee calculations were correct, that rebates were being issued, or that terminated accounts were no longer being charged. The SEC Staff noted that this structural gap makes accurate billing difficult to enforce and nearly impossible to document as compliant.

Where This Fits in the 2026 Examination Environment

This Risk Alert does not stand alone. The SEC Staff publishes annual examination priorities, and the 2026 priorities continue several themes that have been on the list for years.

Five consecutive years of examination focus means examiners have developed mature, specific expectations for what adequate policies, disclosures, and controls look like. The Risk Alert is, in effect, a detailed record of what behavior is falling short of those expectations right now.

The June 2026 alert also directly reinforces patterns that Bates Group's Regulatory and Investigations practitioners have been tracking since 2024: the SEC's active focus on investment advisory fee miscalculations. Fee billing errors including failing to refund pre-paid fees upon termination, incorrect application of tiered schedules, and householding errors have been part of ongoing SEC investigations and examination findings. They are named explicitly in the Risk Alert.

What This Means for Your Firm

Registered investment advisers: Every revenue stream the firm participates in (e.g., cash management programs, sweep arrangements, fund share class selection, custodial relationships) requires a documented conflict analysis and disclosure. The question examiners ask is not whether a conflict exists, but whether the firm has fully disclosed it and obtained informed client consent. Advisers that rely on vague or permissive language in their ADV disclosures are at risk.

Affiliated broker-dealers: The Risk Alert identifies broker-dealer affiliate relationships as a specific examination focus. Revenue flowing to an affiliated broker-dealer from clearing arrangements, fund-level fees, or interest rate markups generates conflicts that the SEC Staff expects to see addressed in both the adviser's policies and its Form ADV. Firms that have these relationships face a higher obligation to document the boundaries between advisory and brokerage activities and to disclose where those activities generate revenue at the client's expense.

CCOs and firm principals: The compliance program itself is under examination. Written procedures must accurately describe how the firm operates, not just what it intends to do. Controls must exist and firms must document that they follow procedures. An annual review that confirms a program exists is not sufficient if that program does not include mechanisms to catch billing errors, identify disclosure gaps, or escalate conflicts when they arise. 

Practical Steps Firms Should Take Now

• Audit Form ADV disclosures under Items 10 and 12 against actual compensation arrangements, affiliate relationships, and revenue-sharing agreements. Confirm that every arrangement that currently produces revenue to the firm or its affiliates is disclosed with specificity, not merely noted as a possibility.
• Map all revenue streams across advisory, affiliated, and custodial relationships and identify which ones create conflicts of interest. Document the conflict, the disclosure made to clients, and the basis for informed consent.
• Test fee billing practices against current advisory agreements. Verify tiered fee rate application, householding logic, prorating methodology, and handling of inactive or terminating accounts. Review whether fee refunds on pre-paid periods are being issued consistently.
• Review compliance policies and procedures for internal consistency: confirm that the language in the compliance manual, the disclosures in the ADV, and the terms in client agreements align with each other and with actual firm practices.
• Implement monitoring controls if they do not already exist, and conduct periodic testing of fee calculations, as well as have in place a defined process for reviewing billing exceptions, and a documented workflow for issuing refunds and rebates to terminated accounts.

When advisers need to assess their exposure to the SEC Staff's findings, the consequences of disclosure gaps and billing errors can include restitution obligations, remediation requirements, and enforcement referrals. Bates Group's compliance team helps registered investment advisers assess where they stand, address identified weaknesses, and build the documented evidence that examiners expect to see. We assist with:

Rule 206(4)-7 Annual Reviews: A formal assessment of the adequacy and effectiveness of the firm's policies and procedures, conducted by an experienced Bates compliance professional and delivered as a written report. Where the firm's last review did not address conflict identification, disclosure accuracy, or billing controls at the level this Risk Alert requires, an interim review is an appropriate response.

Consistency Reviews: A direct comparison of the firm's regulatory disclosures, compliance manual, advisory agreements, and marketing materials, designed specifically to identify the internal contradictions and omissions the SEC Staff flagged in Sections C and D of the Risk Alert.

Compliance Program Gap Assessments: An evaluation of written policies and procedures against current examination standards, covering conflict identification workflows, fee billing controls, monitoring mechanisms, and documentation requirements.

Risk Assessments: A structured review of the firm's business model, compensation arrangements, and affiliate relationships to identify and document areas of regulatory risk is the starting point for building adequate disclosures and controls.

Outsourced CCO Services: For firms that need experienced compliance leadership on an ongoing basis, Bates provides seasoned professionals to serve as CCO and guide the firm through regulatory risk decisions, conflict management, disclosure review, and program administration.

Exam Preparation and Remediation Support: Firms that have received an exam request or deficiency letter in connection with fee billing or conflict disclosure can engage Bates for targeted support at any stage of the examination cycle, including mock examinations, document request response, and remediation program design.

Contact Bates Group today to schedule a consultation