Key Question
Are broker-dealers and investment advisers doing enough to identify, mitigate, disclose, and test the economic incentives that may influence their recommendations and services?
Our View
Broker-dealers, RIAs, compliance officers, and senior management should treat the SEC’s recent examination observations as a call to test how economic conflicts operate in practice, rather than relying on generalized disclosures or policies that do not align with the firm’s compensation, recommendation, and billing practices.
Executive Summary
On June 9, 2026, the Securities and Exchange Commission’s Division of Examinations published a Risk Alert addressing investment adviser economic conflicts of interest. The staff identified undisclosed, incomplete, or misleading conflicts; practices inconsistent with advisory agreements and disclosures; inaccurate fee billing; and compliance programs that failed to fully address economic incentives. The observations focused particularly on cash-management programs, revenue sharing, money market and mutual fund share-class selection, custodial credits, margin arrangements, transaction markups, and advisory fees. Although the Risk Alert directly addresses SEC-registered investment advisers, its core message is also important to broker-dealers subject to Regulation Best Interest (“Reg BI”), especially dual registrants operating brokerage and advisory platforms. The applicable legal standards are not identical, but both require firms to identify conflicts and ensure that the firm’s or financial professional’s interests are not placed ahead of the retail investor’s interests. Firms should therefore integrate their conflict inventory, disclosures, agreements, compensation data, recommendation reviews, and billing tests into a single, demonstrable control framework.
Regulatory Background
The Risk Alert does not establish a new rule or legal obligation. It communicates staff observations from examinations and expressly states that it has no legal force or effect. Nevertheless, it is significant because it outlines the conditions SEC examiners are finding and the controls they are evaluating when reviewing economic conflicts. The staff also noted that economic incentives have been included in the Division’s examination priorities since 2021 and remain an area warranting routine review.
For investment advisers, the governing framework begins with Section 206 of the Investment Advisers Act of 1940. The SEC’s 2019 Investment Adviser Fiduciary Interpretation explains that an adviser’s fiduciary duty includes duties of care and loyalty. An adviser must eliminate or make full and fair disclosure of conflicts that might, consciously or unconsciously, incline the adviser to render non-disinterested advice. If a conflict cannot be disclosed in a manner that permits informed consent, the adviser should eliminate or adequately mitigate it. Rule 206(4)-7 separately requires SEC-registered advisers to adopt and implement written policies and procedures reasonably designed to prevent violations, to review them annually, and to designate a chief compliance officer to administer them.
Broker-dealers are subject to a different but related framework when making recommendations to retail customers. Regulation Best Interest requires compliance with Disclosure, Care, Conflict of Interest, and Compliance Obligations. Among other requirements, a broker-dealer must maintain and enforce policies reasonably designed to identify conflicts associated with recommendations and at least disclose or eliminate them, mitigate conflicts at the associated-person level, address material limitations on recommendations, and eliminate sales contests, quotas, bonuses, and non-cash compensation based on sales of specific securities or types of securities within a limited period. The SEC has emphasized that Reg BI cannot be satisfied by disclosure alone.
The SEC staff’s 2022 Conflicts of Interest Bulletin further describes conflict identification as a robust, ongoing process rather than a check-the-box exercise. Its separate Account Recommendations Bulletin highlights the heightened risk for dual registrants and dually licensed professionals deciding between brokerage and advisory accounts. While these staff bulletins, like the 2026 Risk Alert, express staff views and do not create new legal obligations, they still provide a useful lens for examinations.
Why This Matters
The Risk Alert shows that conflict management is not merely a disclosure exercise. Examiners are comparing what the firm earns, what it recommends, what its agreements and disclosures promise, what clients are charged, and what the compliance program actually tests. A weakness in any one of those areas can expose a larger inconsistency across the firm’s control environment.
Cash Management Is an Investment and Compensation Issue. The staff observed advisers recommending cash-management programs, including arrangements with affiliated parties, while receiving revenue tied to client cash balances. Deficiencies included failing to disclose custodian revenue, incentives to select the most remunerative sweep vehicle, advisory fees charged on cash, the impact of fees on returns, and the availability of lower-cost money market fund share classes. The staff also criticized disclosures stating that an adviser “may” receive revenue when the adviser actually did.
For RIAs, cash should therefore be included in investment oversight, conflict disclosure, and fee testing. For broker-dealers, cash alternatives recommended to retail customers can implicate Reg BI when the communication constitutes a recommendation. Dual registrants should assess whether brokerage and advisory cash options, yields, fees, and compensation are reviewed consistently and whether representatives understand which capacity and standard apply.
Revenue Arrangements Must Be Traced to Recommendations. The staff identified conflicts involving Rule 12b-1 fees, higher-cost mutual fund share classes, custodial and clearing credits, margin-loan interest markups, transaction markups, and termination-related economics. These arrangements are not necessarily prohibited, but they can influence recommendations regarding products, services, custodians, or accounts. A generic statement that the firm receives “other compensation” may not explain who pays it, when it is earned, how it varies, which clients or products are affected, or how it creates an incentive.
Broker-dealers should map these incentives to the specific recommendations and associated persons they affect and determine whether Reg BI requires disclosure, mitigation, or elimination. RIAs should determine whether disclosure is sufficiently specific to support informed consent and whether the conflict must be eliminated or modified because it cannot be fully and fairly disclosed. Dual registrants should also test whether compensation is accurately described across Form ADV, Form CRS, brokerage disclosures, advisory agreements, and representative communications.
Billing Accuracy Is Part of Conflict Governance. The Risk Alert links conflicts to fee administration. Staff observed fees that deviated from advisory agreements or Form ADV disclosures, including improper proration, charges on excluded assets, missed householding breakpoints, unrebated transaction fees, charges for services not provided, duplicative billing, and failures to refund prepaid fees after termination. These examples show that a well-drafted brochure does not correct operational practices that produce different results.
Firms should not isolate billing within finance or operations. Compliance should receive the data needed to test representative samples, exceptions, and refunds. The testing population should include inactive accounts, cash-heavy accounts, terminated relationships, negotiated rates, household accounts, excluded assets, and manual fee adjustments. Findings should be documented, escalated, and remediated, including client reimbursement when appropriate.
Dual Registrants Face Cross-Platform Consistency Risk. A dual registrant may have different permissible compensation structures and disclosure documents for its brokerage and advisory businesses, but clients often experience the firm and the financial professional as a single relationship. This makes inconsistent inventories, terminology, product menus, or review methods particularly risky. An account recommendation can change the applicable compensation, services, and ongoing obligations. Firms should document the reasonably available alternatives considered, the capacity in which the professional acted, the investor information evaluated, the costs and services compared, and the conflicts associated with the selected account.
Recommended Actions
Firms should use the Risk Alert as a targeted testing guide. The objective is not simply to add language to disclosures, but to establish evidence that actual incentives, recommendations, fees, and controls remain aligned.
- Update the conflict inventory. Identify direct and indirect economic benefits received by the firm, affiliates, and financial professionals. Map each benefit to the affected products, services, account types, custodians, clearing arrangements, and client populations.
- Reconcile disclosures and agreements. Compare Form ADV, Form CRS, brokerage disclosures, advisory contracts, fee schedules, and client communications. Replace conditional “may” language where a conflict actually exists, while preserving conditional language for genuinely potential conflicts.
- Evaluate mitigation and elimination. Determine whether disclosure is legally and practically sufficient. Review payout grids, thresholds, differential compensation, limited product menus, contests, bonuses, and affiliate incentives for controls required under Reg BI or the adviser’s fiduciary duty.
- Test recommendations and billing. Use transaction, account, cash-balance, and compensation data to identify patterns correlated with higher firm or representative compensation. Independently recalculate fees and test rebates, refunds, exclusions, breakpoints, and terminated accounts.
- Strengthen governance and documentation. Assign owners, review findings through compliance and senior management channels, retain evidence of testing and remediation, and update training for representatives, supervisors, and operations and billing personnel.
Key Takeaways
Taken together, the SEC’s observations underscore several practical lessons that broker-dealers, RIAs, and dual registrants should incorporate into their conflict-management, disclosure, billing, and supervisory frameworks.
- Actual practices control. Regulators will compare compensation and billing data with the firm’s disclosures, agreements, recommendations, and procedures. A conflict policy that does not reflect the business model provides limited protection.
- Disclosure is not always enough. RIAs must determine whether disclosure permits informed consent, while broker-dealers must apply Reg BI’s specific disclosure, mitigation, and elimination requirements. Neither framework supports a disclosure-only approach to every conflict.
- Cash and billing deserve substantive review. Cash sweeps, money market funds, asset-based fees, breakpoints, refunds, and inactive accounts can create both client harm and evidence of weak controls.
- Dual registrants need an integrated framework. Brokerage and advisory standards should be analyzed separately but governed through consistent data, escalation, testing, and documentation.
Conclusion
The SEC’s 2026 observations reinforce a longstanding regulatory principle: economic conflicts must be identified and addressed as they actually operate, not merely as they are described in templates. For RIAs, this means full and fair disclosure, informed consent where possible, appropriate mitigation or elimination, accurate billing, and an effective compliance program. For broker-dealers, it means applying Reg BI’s component obligations to the incentives tied to each recommendation. Firms that can trace compensation to recommendations, reconcile their disclosures with operations, and produce evidence of testing will be better positioned to protect clients and defend their compliance programs during an examination.