Overview
On June 9, 2026, the Securities and Exchange Commission’s (SEC) Division of Examinations (the ‘Staff’) issued a Risk Alert highlighting deficiencies observed during recent examinations of SEC-registered investment advisers related to economic conflicts of interest. The alert reinforces an adviser's fiduciary duty under Section 206 of the Investment Advisers Act of 1940 (the ‘Advisers Act’) to eliminate, or at minimum fully and fairly disclose, any conflict that could compromise the provision of disinterested advice and signal where examiners will focus in the months ahead.
At the center of the Staff's findings is a clear and recurring theme: compliance programs are falling short in identifying and addressing fee-related conflicts. Advisers should view this alert as both a roadmap of Staff expectations and a checklist for self-assessment beginning with a hard look at their own compliance program.
Lead Concern: Compliance Programs Falling Short on Fee-Related Issues
A central theme throughout the Risk Alert is a foundational issue under Rule 206(4)-7: Advisers had not adopted and implemented written policies and procedures reasonably designed to prevent violations of the Advisers Act, consistent with the nature of their operations. In particular, written policies did not explain how advisers would execute their billing practices accurately and in a manner consistent with their fiduciary obligations, advisory agreements and disclosures.
The Staff highlighted three areas where compliance programs most often broke down:
Describing Fee-Related Practices Clearly and Consistently
The Staff observed advisers whose compliance policies, client disclosures and signed advisory agreements contained conflicting information about fees including, notably, the adviser's authority to directly withdraw advisory fees from client accounts. Fee schedules and narrative disclosures were often inconsistent across documents, overly complicated or difficult to reconcile.
Monitoring for Accurate Fee Billing
Many advisers lacked controls to confirm that fees and rebates were calculated and applied correctly, resulting in client overcharges. The Staff specifically cited the absence of controls to:
- Monitor the accuracy of all types of client fees assessed.
- Test fee calculations for errors, including manual input errors in prorated fee calculations.
- Validate that rebates and refunds were issued to terminated accounts, and that advisory fees were not continuing to be charged after a client relationship had ended.
Addressing All Types of Billing Arrangements
Policies and procedures frequently failed to capture the full range of fee arrangements in use across the adviser's client base, including:
- Prepaid fees and associated refund mechanics
- Fee reductions, such as householding of related accounts
- Margin on client accounts and its impact on billable assets
The bottom line: Boilerplate fiduciary language and high-level policies no longer meet the Staff's expectations. Compliance programs should be built around tailored testing, documented controls and ongoing oversight designed to address the specific billing arrangements and economic conflicts that exist within each adviser's business model.
Additional Areas of Focus
Cash Management Recommendations
The Staff identified disclosure and conflict-management failures around cash sweep programs, particularly those involving affiliated banks, custodians or clearing broker-dealers. Common deficiencies included:
- Failure to disclose revenue-sharing arrangements tied to cash sweep programs
- Use of vague "may receive" language when compensation is, in fact, being received
- Failure to disclose that advisory fees apply to cash sweep balances, potentially yielding negative net returns
- Failure to disclose economic incentives tied to money market fund share class selection, including the availability of lower-cost shares
Other Revenue Opportunities
Examiners flagged additional undisclosed (or inadequately disclosed) revenue streams, including:
- Mutual fund share class selection where higher-cost classes (e.g., those paying 12b-1 fees) were selected when lower-cost classes of the same fund were available
- Economic benefits from custodial credits, margin loans and transaction markups flowing to the adviser or its affiliates
Form ADV Disclosure Gaps
The Staff observed incomplete or inconsistent disclosures in Form ADV Part 2A, with particular attention to:
- Item 10 - Other Financial Industry Activities and Affiliations
- Item 12 - Brokerage Practices
Together, these gaps limit clients' ability to understand the full economic picture behind their adviser's recommendations.
Fees Inconsistent with Advisory Agreements
Examiners identified advisers charging fees that did not align with their advisory agreements or disclosed fee schedules, including incorrect calculation methodologies, billing on excluded assets and inconsistent timing of fee assessments.
What This Means for Advisers
The Risk Alert is a clear signal that the Staff expects advisers to:
- Build fee-focused compliance programs with tailored policies, controls and testing that cover every billing arrangement in use not just the most common ones and ensure procedures are reasonably designed to identify, disclose, monitor and address economic conflicts, and related fee risks on an ongoing basis.
- Reconcile policies, disclosures and advisory agreements so that fee terms, withdrawal authority and fee schedules are consistent across every client-facing document including Form ADV, private placement memoranda, limited partnership agreements, subscription documents, advisory agreements, investor letters and related marketing or onboarding materials.
- Implement documented controls to test fee calculations, identify manual input errors and confirm that rebates and refunds are properly applied, including to terminated accounts, by testing actual billing practices against advisory agreements, Form ADV disclosures and client communications to confirm that fees and expenses are calculated and charged accurately.
- Identify and inventory every source of direct or indirect economic benefit, including affiliated arrangements, cash sweep programs, revenue sharing, share class selection, margin lending, custodial credits, transaction-based compensation, expense allocations, cash management practices and other compensation or incentive arrangements.
- Replace hedging language with accurate, present-tense disclosures wherever a conflict exists, and avoid generic “may” disclosures when the adviser or its personnel already receive the economic benefit or when the conflict is otherwise present.
- Reconcile Form ADV Items 10 and 12 with actual business practices and update them promptly when arrangements change, ensuring conflicts are described clearly, specifically and consistently with how the adviser’s business operates in practice.
- Review disclosures for consistency not only across documents, but also against actual practices, particularly where compensation arrangements, affiliate relationships, revenue sharing, fee calculations, expense allocations, cash management practices or other economic incentives may create conflicts of interest.
How Kroll Can Help
Kroll's Financial Services Compliance and Regulation Team partners with registered investment advisers to navigate the SEC's evolving examination priorities with practical, risk-based solutions, including:
- Compliance program enhancements under Rule 206(4)-7, including tailored policies, procedures and fee-focused testing programs
- Fee billing reviews and reconciliations against advisory agreements, disclosures and fund offering documents
- Conflicts of Interest Matrix development, review and ongoing monitoring
- Form ADV review and updates, with focused attention on Items 10 and 12
- Mock SEC exams and gap analyses targeting the issues highlighted in the Risk Alert and other areas of exam focus
Our team of former CCOs, SEC regulators and senior industry professionals, helps clients move from reactive compliance to proactive risk management.
