The SEC’s Division of Examinations issued a Risk Alert on June 9, outlining serious concerns about economic conflicts of interest among investment advisers.
The alert highlights cases where advisers failed to disclose or sufficiently disclose conflicts of interest in cash management and revenue-sharing arrangements with clients.
Advisers also frequently failed to implement reasonably designed compliance policies and procedures regarding fee-related matters, according to the Division’s observations.
A further concern involved advisers calculating and charging advisory fees inconsistently with client advisory agreements, governing documents, or related disclosures.
Cash sweep programs drew particular scrutiny, with the Division observing advisers recommending programs that automatically swept uninvested client cash into interest-bearing accounts, including accounts at affiliated parties.
In some instances, advisers stated they “may” receive revenue from third-party cash sweep programs when they were already receiving such revenue, a disclosure practice the SEC has deemed inadequate.
Revenue-sharing arrangements with clearing broker-dealers and custodians represented another significant area of concern, with some advisers failing to disclose interest rate markups on margin loans to advisory clients.
The Division also found that some advisers received 12b-1 fees from mutual fund share class selections despite lower-cost share classes being available to clients.
Form ADV disclosure deficiencies were widespread, with advisers failing to meet requirements under Items 10 and 12 of the brochure, limiting clients’ ability to understand costs and provide informed consent.
Fee calculation practices frequently deviated from advisory agreements, including prorating fees without disclosure, billing on excluded asset classes, and failing to apply breakpoints.
The Division found cases where advisers charged fees on inactive accounts that clients had requested in writing to close, and on accounts where advisory personnel had departed without reassignment.
Compliance programs also fell short, lacking adequate monitoring controls to test for fee calculation errors or validate that refunds were issued to terminated accounts.
Law firm Katten, whose advisers Adam Bolter and Michael S. Didiuk authored analysis of the alert, recommend that advisers evaluate whether fee practices and revenue arrangements align with their fiduciary duty.
Katten further advises firms to align billing practices with agreements and disclosures, identify and correct overcharges, and ensure all disclosures are clear, complete, and written in plain English.