SEC to Advisers: Don’t Say ‘May’ When You Mean ‘Does’

Periodically, the SEC’s Division of Examinations cautions the investment adviser industry on areas where it has identified particular issues and associated risks during its examinations. On June 9, it did so again, publishing a risk alert on economic conflicts of interest that outlines the Division of Examination’s examination priorities for the next several cycles. 

For chief compliance officers, general counsel and their outside advisers, the message is direct: Disclosing that a conflict may exist no longer satisfies the adviser’s fiduciary obligation, and examiners will scrutinize whether a firm’s Form ADV disclosure accurately reflects the conflicts that exist in client accounts.

The risk alert draws on deficiencies that examination staff have repeatedly identified, and it arrives at a moment when the same theme appears in the Division of Examination’s 2026 examination priorities, which also emphasizes the impact of advisers’ financial conflicts on the advice clients receive. Read together, the two publications confirm that economic incentives, how advisers and their personnel are compensated (and by whom) will play a major role in examination scoping for the foreseeable future.

Why conflicts sit at the core of an adviser’s fiduciary duty

The risk alert is grounded in a principle that predates it by decades. Under Section 206 of the Investment Advisers Act of 1940 (as amended), an investment adviser is a fiduciary that owes its clients a duty of loyalty and a duty of care. The Division of Examinations opens the alert by reminding advisers that they must eliminate — or at least disclose fully and fairly — all conflicts that might incline them, consciously or unconsciously, to render advice that is not disinterested and in the best interests of its clients. That formulation traces to the Supreme Court’s decision in SEC v. Capital Gains Research Bureau, Inc. and the division’s 2019 interpretation regarding standard of conduct for investment advisers.

The duty of loyalty is where most economic conflicts reside. The 2019 interpretation makes clear that standing alone, disclosure in the event of a conflict is not a cure. Where an adviser cannot fully and fairly disclose a conflict such that a client can provide informed consent, the adviser must either eliminate the conflict or mitigate it. The risk alert sharpens that principle by targeting hedged, permissive language. Representing to a client that the firm may receive revenue on cash balances when the firm in fact does exemplifies the disclosure deficiency the division considers inadequate, a position the SEC articulated in the 2019 interpretation. For advisers, the practical implication is clear: Boilerplate qualifiers now create regulatory exposure rather than insulate against it.

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5 deficiency patterns examiners are flagging

The risk alert identifies five recurring deficiency patterns. Each corresponds to a familiar revenue stream, and examination staff can test each against a firm’s disclosures, advisory agreements and actual practices.

• Cash sweep and cash management programs. Advisers recommended cash sweep vehicles held at affiliated or third parties that generated revenue for the adviser or its affiliates without clearly disclosing the conflict. The staff flagged compensation tied to client cash balances, incentives to recommend options that yielded more for the adviser and disclosures that failed to explain the revenue received and the effect of fees on investor returns, including potentially negative returns.
• Mutual fund share class selection. Advisers selected higher-cost share classes that paid 12b-1 fees or revenue sharing to the adviser when lower-cost classes of the same fund were available. The staff also flagged undisclosed benefits from custodial credits, margin loans and transaction markups.
• Incomplete or misleading Form ADV disclosures. Filings contained vague, inconsistent or incomplete disclosures about financial industry affiliations (Item 7 in Part 1A and Item 10 in Part 2A of Form ADV) and broker-dealer selection and compensation practices (Item 12), obscuring the full scope of an adviser’s economic incentives.
• Fee billing inconsistencies and overcharges. The staff observed systemic billing issues that deviated from advisory agreements and disclosures, including improper proration, billing on excluded asset types, charging for services no longer provided, double-billing and failure to refund prepaid fees after termination.
• Compliance program gaps. Programs lacked the specificity to address all active billing arrangements, failed to describe fee-related practices clearly and consistently and did not adequately describe ongoing monitoring and testing to ensure accurate billing.

Each of these categories underscores a common imperative: Advisory firms must ensure that their disclosures accurately reflect actual business operations and revenue arrangements.

Turning the alert into an action plan

The risk alert is not a rule, but it functions as a preview of examination inquiries, and advisers should prepare accordingly. Several steps follow directly from the deficiencies the Division of Examinations has identified.

• First, reconcile disclosures with actual practice. Compare Form ADV Part 2A, advisory agreements and client-facing materials against how fees are actually billed and how revenue is actually earned. Where a conflict exists rather than is merely hypothetical, replace permissive “may” language with accurate, specific statements.
• Second, treat fee billing as a control function, not merely a back-office process. Test proration methods, excluded asset types, terminated-account procedures and management fee offsets against the governing agreements. Given that billing errors have driven recent enforcement actions, documented testing serves as both a compliance safeguard and contemporaneous evidence of diligence.
• Third, revisit the firm’s compliance program with specificity. Rule 206(4)-7 under the Advisers Act requires registered advisers to adopt and implement written policies and procedures reasonably designed to prevent violations and to review those policies at least annually for adequacy and effectiveness. Compliance programs that fail to address each active billing arrangement and conflict and that do not describe how the firm monitors and tests them exemplify the gaps the Division of Examinations has identified.
• Fourth, scrutinize arrangements with affiliates and cash management programs. Where an affiliate earns revenue on client cash or where share class selection financially benefits the adviser, confirm that the conflict is disclosed with sufficient specificity to permit informed consent and evaluate whether mitigation or elimination of the conflict is the more prudent course.

For private fund managers, the fund governance implications are particularly significant. Fee offsets, expense allocations and affiliated service arrangements are recurring diligence topics for institutional investors and their counsel, and the disclosures that satisfy a limited partner’s expectations should align with the adviser’s Form ADV and its books and records. Harmonizing fund documents, side letters and regulatory disclosures materially reduces the risk that an examiner or an institutional investor identifies inconsistencies among them.

The central principle underlying the risk alert is that a fiduciary may not always rely on disclosure alone to cure a conflict of interest that the fiduciary has failed to describe accurately. Investment advisers that treat the alert as a framework for self-assessment, examining the alignment of their representations with actual conduct across disclosure documents, advisory agreements, fee billing practices and compliance testing protocols, will be substantially better prepared when examination staff apply the same standards.