"May" Isn't Enough: Key Takeaways from the SEC's Latest Risk Alert
By Lance Whittemore, Compliance Associate
On June 9, 2026, the SEC Division of Examinations released a Risk Alert titled Examinations Observations of Investment Adviser Obligations Related to Economic Conflicts of Interest, which can be found HERE.
The Risk Alert reminds advisers that in an exam the SEC will prioritize the review of any economic incentives advisers may have to recommend certain products, services or account types to ensure advisers have complied with their fiduciary duty in the context of those economic conflicts. The Risk Alert discusses specific observations from recent exams where advisers failed to provide adequate disclosure of economic conflicts of interest regarding cash management recommendations and other revenue opportunities (i.e. share class selection, custodial credits, margin loans and credits, transaction markup fees). The Risk Alert also discusses examples where advisers calculated and charged fees and expenses contrary to client disclosures.
This article presents a summary of the SEC’s specific observations and provides practical tips to help ensure that your firm satisfies its fiduciary obligations regarding economic conflicts of interest.
Cash Management
The SEC observed advisers which receive payment or other incentives for sweeping cash balances into interest-bearing accounts or sweep vehicles without proper disclosure or without regard to whether they were the best choice for the client. Among the issues they cited were:
· Undisclosed revenue-sharing arrangements with custodians or affiliates, including bank-sweep products
· Billing of cash-equivalents which was undisclosed or contrary to client agreements, even resulting in a negative return to the client
· Use of revenue-sharing cash-sweep vehicles when lower-cost vehicles were available
· Use of the word “may” to describe actual adviser business practices
Other Revenues and Benefits
The staff noted failures of Advisers to disclose benefits to themselves or a broker-dealer affiliate, including:
· Mutual fund share class selection revenues
· Custodial fees and other benefits
· Margin loan and credit markups
· Assessment of fees and expenses not charged by clearing broker-dealers, or markup of such fees and expenses
Form ADV Part 2A Disclosures
SEC noted the following, in their words, “compensation-related misstatements or omissions” during their review:
· Failure to fully disclose all of an adviser’s activities and affiliations in Item 10
· Failure to disclose the way an affiliate benefitted from custody, trade execution, sweep products, or fees and expenses
· Failure to fully, consistently, and clearly describe in Item 11 benefits the adviser receives, or other factors considered, in selecting or recommending the services of broker/dealers, clearing agents, and custodians
Fees, Fee Calculation, and Fee-Related Disclosures
Some exams revealed inconsistencies between agreements, disclosures, and actual billing practices. Among these:
· Billing on assets which were excluded (or subject to lower rates) by agreement (ie, fixed income, initial cash inflows, fixed-income mutual funds)
· Failure to recognize agreed-upon breakpoints or to rebate transaction fees
· Billing accounts or failing to refund unearned fees where no adviser was providing services or an account had been closed
Compliance Rule Observations
The Risk Alert reminds us of the intersection of disclosure obligations, client agreements, and the Compliance Rule. The SEC noted that many compliance programs examined fell short in several ways. These included failures to:
· Test all types of billing arrangements
· Describe and understand all fee-related practices clearly and consistently
· Capture all types of fees and expenses in testing
· Identify and rebate fees collected to terminated or dormant accounts
The Big Picture
The general concepts covered here are fundamentally simple: advisers are obligated to fully and fairly disclose and mitigate conflicts of interest, act in the client’s best interests, and to bill accurately for their services. The SEC’s 2019 fiduciary interpretation reminds us that the adviser’s fiduciary duty includes an obligation to act in the best interest of the clients, but that fiduciary duty simultaneously “follows the contours of the relationship… and [the parties] may shape that relationship by agreement, provided that there is full and fair disclosure and informed consent.” Such consent can only be given when a firm’s disclosures are thorough, accurate, easy to understand, and fully aligned with the terms of an equally clear advisory agreement. Likewise, the disclosures and agreement must fully match the firm’s actual revenue, benefits, and billing practices, each of which must be reviewed and tested to ensure that nothing has been missed. Full, accurate, and fair disclosure go a long way toward ensuring that an adviser’s business practices remain aligned with its fiduciary duty.
Practice Tips:
Advisers should consider the following action steps to help ensure that they satisfy their fiduciary obligations related to economic conflicts of interest.
· Create and maintain a thorough conflict-of-interest inventory- these include but are not limited to revenue-sharing agreements, clearing and trading arrangements, benefits to affiliates, and other factors which have the potential to influence your services. Include any revenue or credit not derived from client advisory fees.
· Ensure that agreements, marketing disclosures, and your ADV Part 2A Brochure are easy to understand, match your actual billing and management practices, and are consistent with one another.
· When disclosing your compensation and revenue arrangements, make them clear and complete. Do not use the word “may” if you actually engage in a practice. Describe costs and benefits as clearly as possible.