On March 27, 2026, the SEC issued a notice of intent to increase the thresholds that define...
Insights on Operational Reality from a Former SEC Exam Manager
When the SEC's Division of Examinations issues a Risk Alert, the practical message is straightforward: these are the areas where firms are still getting it wrong. The 2026 Alert on economic conflicts of interest covers topics such as share class selection, broker-dealer and clearing arrangements, and fee billing practices. None of it is new. All of it is still showing up in examinations — and when it does, remediation costs can be significant.
Below are key areas advisers should evaluate through an examination lens.
1. Share Class Selection: Not Just Incentives
Share class selection remains a frequent examination focus, particularly where advisers or affiliates receive 12b-1 fees while lower-cost alternatives are available. However, advisers that do not receive 12b-1 fees should still recognize that their fiduciary duty applies regardless of whether the adviser benefits directly from share class selection decisions.
Deficiencies are often driven by operational breakdowns rather than intentional conduct: legacy share classes left in place without periodic review, limited awareness of available conversions (e.g., “A” to “I” shares), and uncertainty around tax treatment leading to inaction.
From an examination perspective, the central question is whether the firm has a reasonably designed process to identify and address lower-cost alternatives over time. Where higher cost share classes are noted, exam staff may evaluate whether client remediation is appropriate based on impact and duration.
2. Clearing Arrangements: Follow the Revenue
Clearing arrangements draw attention quickly when advisers are affiliated with broker-dealers or are dually registered. These arrangements often contain embedded economic incentives — including revenue-sharing tied to cash sweep programs or mutual fund activity, service fee markups, and contractual terms that may influence platform selection — that must be identified, managed, and disclosed.
Firms should be able to map these arrangements to disclosure documents and demonstrate that disclosures reflect current business operations. In practice, examinations often turn on whether firms have identified all sources of revenue and disclosed any resulting conflicts. When finance, operations, and compliance are not communicating, revenue arrangements frequently go undisclosed — not because of intent, but because no one connected the dots.
3. Disclosure Precision: The “May Receive” Problem
A recurring issue involves conditional disclosure language where the underlying arrangement already exists in practice and is operationally material to revenue or client outcomes. Disclosures should describe arrangements as they operate, rather than framing them solely as potential conflicts or using language such as the adviser “may receive” revenue where receipt is consistent and ongoing.
For example, if Form ADV states the adviser “may receive” revenue sharing from custodian cash sweep programs, but such revenue is received across all applicable accounts, examiners will typically focus on whether disclosure accurately reflects the actual arrangement.
Maintaining alignment between disclosure and practice is a core component of the fiduciary duty of full and fair disclosure.
4. Fee Billing: Where One Issue Can Become Firm-Wide Questions
Fee billing is consistently one of the highest-impact areas in examinations because it is both measurable and directly tied to client accounts. When examiners identify a billing issue, the inquiry often expands to determine whether the issue is isolated or systemic — including how long it persisted and whether other clients were affected.
Common issues include billing methodologies that deviate from Form ADV disclosure, failure to apply breakpoints or householding, and terminated accounts not receiving appropriate refunds.
As a result, billing issues frequently lead to firm-wide lookbacks and reimbursement calculations. Periodic testing and reconciliation across billing systems, advisory agreements, and disclosures is therefore critical.
Closing Thought
Most examination findings do not stem from missing policies, but from gaps between written procedures, disclosures, and actual operations.
Firms that consistently perform well demonstrate alignment across all three — supported by ongoing testing, supervision, and documentation that holds up under examination scrutiny.
